Monthly Commentaries

Food, Energy and the Balance of Power. – April, 2008

It's no wonder that any measure of core inflation excludes the ever-volatile food and energy components. We're led to believe that the primary reason is weather related - droughts, floods, or other unseasonable conditions of nature that disrupt our food and energy supplies to cause intermediate price distortions. However, it is the intransigence of incessantly meddling public policy that is largely responsible for restricting the orderly flow of these strategic global assets to global markets, resulting in shortages, congestion and erratic price behaviour. Wealthy countries with massive agricultural surpluses, such as the USA, Canada and the countries of the European Union have kept international prices buoyant by donating part of their harvest, destroying another part and paying farmers to let land lie fallow. The influence of their powerful farm lobbies has also frustrated and stalled progress on a new World Trade Organization round. Poorer countries, including Egypt, Kazakhstan, Ukraine, India and Indonesia have restricted their food exports to combat the social unrest accompanying rising prices. To compound the problem, some of the poorer countries also have food import quotas designed to protect local producers.

This myriad of laws, regulations, subsidies and tariffs - all promulgated in the name of protectionism - contribute to the absurd statistic that only 6% to 7% of world rice production is exported. In energy we are seeing the transformation of the world's oil and gas supply from private, investor controlled and market driven hands to state controlled businesses. The top 10 oil firms in the world are all state owned, with only some 10% of global oil reserves in the hands of investor owned firms such as Exxon Mobil. As with food, politically motivated state sponsored supply restrictions are the major cause of market disruptions and rising prices. There are unquestionably other factors aggravating the surge in food and energy prices. Rapidly rising standards of living in India and Asia raise the demand for food as the number of meals eaten per day increases from one or two to two or three. The dietary shift from grains to meats causes added pressure because a meat diet consumes roughly10 times more grain than a grain diet.. The search for biofuels has encouraged farmers to switch crops to ethanol and the weaker US dollar pushes all commodity prices higher as producers attempt to preserve their margins.

The world is not running out of food any more than it is running out of oil, yet government policy pays only lip service to the open trade and free market options that are essential to cope with changing patterns of demand and supply. Food, however is different from oil. Higher prices and market disruptions can redefine the balance of power as shortages lead to starvation and riots in the poorer countries - including energy producing Venezuela, Kazakhstan and Nigeria that until now thought they held all the cards. Oil never worked that way because the producers were always just as eager to sell as the buyers were to buy. In the current situation, food is both oligopolistic and held in strong hands by nations that can produce and withhold grains without undue stress on themselves. Inept public policy is ironically shifting geopolitical power back toward the industrialized nations of the world. This time, let's use it wisely. Peter Sacks Managing Partner