Chinese Appetites and the Commodities Crunch

Well, everyone who's been conscious knew the day was coming: the now wealthy Chinese (where only 45 years ago people were starving under Mao's absurd agrarian policies) have developed an appetite for MEAT! Especially pork, and they are encouraging their farmers to adopt Western methods of hog feeding, which includes lots of corn.

Who can provide the corn they need? The U.S.! In July alone, according to The Wall Street Journal ('Chinese Hunger for Corn Stretches Farm Belt', p. C1) China ordered 21 million bushels of corn from the U.S. in "one hit". This was more than the U.S. expected the Chines to buy in one year. Then, the Chinese purchased another 2.2 million bushels early this month.

The result? Corn commodities prices are spiking (see accompanying graphs). In fact, corn prices - which have nearly doubled for U.S. consumers over the past year (have you noticed the increased costs of our pork?) climbed another 1% Tuesday. And as the Journal article observed:

The corn futures contract for December delivery at the Chicago Board of Trade rose 7.5 cents to settle at $7.275 a bushel.

This is in addition to China's gigantic soybean consumption, as they now also buy one fourth of all U.S. soybeans - also mainly for feed, including to mix in for catttle - since millions of the Chinese middle classes have now developed a taste for burgers, meat loaf and Chinese variants of them.

If the Chinese keep getting rich off the U.S. - by lending it money (with interest) to pursue stupid "wars" and wasteful defense spending (like building 2,443 F-35 jets) - you can expect they'll have even more cash capacity to expand their middle class, especially given that in the last quarter their GDP rose at an electrifying 9.5% (ibid.) That means commodities prices will soar even higher, and not only for corn and soybeans, but OIL too! (Since many more Chinese are now ditching their bikes and buying automobiles)

Of course, as the Journal notes, that 9.5% spike in GDP is a direct result of government spending and investment, not private entrepeneurs. China is, after all, still a communist nation although it uses the machinery of capitalism to create wealth capacity for its government to do more. So much for the baloney from the Right, and U.S. Tea Baggers that "governments can't create jobs". Yes, they do - and China is the proof. BUT to do that they need revenue! China gets it from the U.S. and we could easily get another $5 trillion in revenue if we had the brains and the balls, just by allowing all the Bush tax cuts to expire from next year, andf pulling out from all further Afghan operations. (A losing wicket we ought to have recognized years ago!)

But whatever the source of the Chinese GDP spike, it's fueled their 1.3 billion population's taste for meats, and this is transferring into economic hurt to U.S. consumers- who are faced with major continued price hikes in beef, pork as well as chicken in the coming months. Bad news for a nation with 14 million still unemployed, and the true figure closer to 19 million (including those who've deerted the job hunt and given up, though the BLS doesn't count them). Oh and let's not forget the other 10 million under-employed! Then people wonder why 43 million people are on food stamps?

However, at least the corn end of the commodities hikes could easily be solved if the government had the gumption to do it. We know the price hikes are being created by a standard supply and demand problem: the Chinese have majorly increased their demand, so the existing corn supply has shrunk, causing prices to spike to over $7.27 a bushel.

The obvious answer then is to increase the corn supply to meet the increased demand. This doesn't take a genius to figure out, only someone with basic Econ 101 background.

How to do that? Simple! Stop using corn (a basic FOOD crop) to make the foolish fuel known as ethanol! Right now, nearly one third of the U.S. corn crop is burned up as ethanol each year. This is a damned disgrace and an outrage, especially given a world wherein starvation is still rampant - check out Somalia now if you need a book mark.

Apart from that ethanol is inefficient! It takes on average 1.1 gallons of oil to create one gallon of ethanol, so in processing it one is not only wasting food, but oil as well!

At least a start has been made in halting a perverse subsidy to the ethanol manufacturers. But more must be done, and that means stopping the conversion of one third of our corn crop each year to ethanol. If people still want ethanol, it's much better to use sugar cane as Brazil has done. In the case of sugar cane, it takes only 0.9 gal of oil to make 1.1 gals. of sugar-cane based ethanol. This is a sensible option since sugar isn't really a food, and is largely responsible for the diabetes epidemic in this country. By doing this, Brazil has rapidly gone from a state of national debt to being in the black.

Something the U.S. could use as an example. If it has any sense left!

The Whine of the Speculators

It was Kevin Phillips, in his superb book, Arrogant Capital, who first noted that whenever an empire or nation is in decline it is speculation that takes precedence over all else and dictates its economy. Such was the case with the 16th century Dutch, as with the British at the end of the 19th century. It is as true today in the U.S.A.

The problem is that speculative enclaves are mostly hidden away from public view, so they are able to conduct their shenanigans beyond the scrutiny of the public mind. G.P. Brockway (The End of Economic Man, Harpers, 1991) has noted that before about fifty years ago one had roughly equal 'productive' and 'speculative' economies based on Main St. and Wall Street, respectively. Real productivity kept growing because real investment was made in hands-on materials, plant, research and labor. Most everyone benefited, including workers - via real (defined benefits) pensions (not '401ks') as well as higher wages, and companies that produced REAL goods.

Sometime after Reagan was canonized, in the 1980s, the speculative economy - which up until then had been kept in the background- began to take control. Much of this became possible through de-regulation, especially of the banking system. The effect was to shift enormous volumes of capital from Main Street to Wall Street.

Now, as oil prices spike to unheard of highs, attention once more has turned to the commodity "traders" .....errr....speculators. By some independent estimates, up to 30% of the current per barrel price of oil is due exclusively to speculation by institutional traders in the oil commodities market. (Alas, these institutional outfits include pension funds, who put their members future welfare and livelihoods at grave risk especially if the oil prices should crash) If Oil is $140 a barrel, that would mean that minus speculative influence it would descend to about $98 a barrel. And the current $4.10 for a gallon of gas would likely recede to $3.50 or even $3.30.

Of course, the speculators and their apologists and protectors in the media don't wish to hear this, nor do they appreciate the daylight cast upon their activities. In the last week alone, I coiunted no less than eight counter-attacks (in The Economist, The Wall Street Journal and The Financial Times) against those who sought to make speculators "scape goats". Much umbrage was taken and editorial bile spilled, but I saw little to convince me the speculators were the "angels" depicted: the "guardians" charged with controlling things in the futures markets for the public good. To which I say, 'Bah', 'Codswallop!' and 'Humbug!"

Commodities traders, like currency speculators (who drove to Thai baht down causing the Asian crisis in 1998) are a mixture of casino gambler and bipedal predatory cockroach. They don't give two squats about anything or anyone except their bottom line! Indeed, these freaks are piling into the commodities racket precisely because the stock market (their usual casino outlet) is tanking, and they can't make enough on their investments.

To the apologists for the precious little speculators and "traders", I ask you to examine this article ('Oil Above $140 on Libya Threat to Cut Output') which appeared in The Financial Times of June 27th (p. 22). The article led off:

"Oil prices rose above $140 a barrel for the first time yesterday as Libya threatened to cut its oil production and Opec's president warned that priuces could surge to $150-170 this summer"

Then two pragraphs lower (caps are my emphasis):

"TRADERS TOOK THE WARNINGS AS A GREEN LIGHT FOR BUYING AND PUSHED OIL TO A HIGH OF $140.05 a BARREL"

Note, the artricle said TRADERS (e.g. speculators) pushed oil to that high! Not oil companies, not space aliens ....not the supply and demand market, but SPECULATORS in the futures market.

This is an important point, since the speculator apologists always begin their counter rants (and insulting the intelligence of the commodities "commoners") by pointing ot that NO actual physical supplies are being diminished, moved or affected by the traders. But no one said they were!

Much like Enron's shell game in energy trading in 2000, wherein no real kilowatts were generated and moved. Rather kilowatts were shifted on paper and increased costs put on as the transactions crossed particular state lines (say from AZ to CA). In the same way, future costs of future oil are bid upon on PAPER by speculators, and these amount to something similar to an auction bid. The difference is that in the hidden commodity-energy auction, unlike an actual auction for a real barrel of oil at say, Sotheby's- every manjack pays the final bid!

So imagine this room, where dozens of speculators ("traders") are bidding on a future amount of oil. The bidding begins maybe at today's market price, say $139. Then some guy yells out: "I bid $140"! And another bozo in the back yells: "I bid $142!" And it finally ends when some clown in an Armani custom-made pinstripe suit bids "$144".

Does he purchase it? Well, only in a hyperbolic way. You see, rather than paying the full price as a real bidder must, say at Sotheby's, the oil trader has margin requirements in oil futures that are often as low as 5%. This means he need only put up 5% of the total cost of the amount bidded on! Would that all auction bidders everywhere had such a grand deal! Problem is when that oil trader leaves the "auction" room (often thousands of miles away in London at the ICE Futures Europe HQ) all of us non-participants get stuck paying his last bid price wherever we live on the planet!

At the very least, to correct this abomination, the "London loophole" needs to be closed and the same standards for margin requirements applied in NY as across the pond in London. This way, cowboy commodities traders cannot continue to wreak havoc on all of us. An excellent prescription is one now proposed by Rep. John Dingell (D, MI) forcing oil speculators to put up collateral of at least 50% of the value of the energy futures in which they trade. Heck, I'd even make it more: say 80%.

Doing this simple step, as Fadel Ghelt - managing director at Oppenheimer & Co. has noted - could bring prices down to $45 to $60 a barrel. ('Oil Speculation Draws Scrutiny' in The Wall Street Journal, June 24, p. A3) . This translates to $2.25 to $2.50 a gallon for gas.

It is high time that the high priests of the Commodities Futures Trading Commission (CFTC)crack down on the casino operator oil traders and their ilk. It is bad enough that a tanking dollar (because of pusillanimous Fed policies and fear of increasing interest rates in an election year)is causing fuel spikes, but at least we can tame the speculative excesses.

These whackos cannot be allowed to play fast and loose with our economic lives.