February 26 – March 4th
The Future of Food: Crisis Prevention
Prices of food in real terms are at their highest since 1984, marking the second major price spike in less than four years. As G20 countries put their focus on food security, the problem needs to be segmented into three types: structural, temporary, and irrelevant. Temporary price shocks are a result of drought in Russia and Argentina, floods in Canada and Pakistan, and other market manipulations by countries and currencies. Energy price spikes also affect the inputs to food such as fertilizer. As for the irrelevant, Nicholas Sarkozy has blamed evil speculators such as hedge funds as the root cause of the food problem, of which there is little evidence. In financial markets, trading is unable to drive up prices in the long run because for every buyer there must be a seller. Structural shifts include the rise of China and India demanding more food and different diets to feed their increasingly urbanized cities. Thus far, the two countries have largely been able to satisfy their own demand, but this year China may become a net importer of wheat. Estimates say that global food production will need to rise by 70% by 2050 in order to keep up with a total population of 9 billion. Climate change is another structural shift that will exacerbate the problem. For the first time since 1960, yields of wheat and rice (the world’s most important crops) are rising more slowly than population growth. To combat the food problem, countries need to invest in agricultural research to boost farm output, reduce waste, and lower tariffs and trade bans that manipulate world markets. Bio-fuel initiatives such as ethanol subsidies are another wasteful business that needlessly distort the market.
Credit default swaps on Venezuelan government debt imply a 50% chance of default by 2015. This is surprising considering Venezuela is currently the world’s 8th largest oil producer. The main reason for the fears has been Mr. Chavez, who has been pillaging the state oil firm PDVSA, and using the profits for social spending. Meanwhile, Chavez has nationalized hundreds of companies resulting in capital flight and causing the country’s economy to depend entirely on oil. He has also created a warped currency system pegging the bolivar at 5.3 to the dollar even though the real dollar price is around 8-10 per dollar. To appease public unrest, the government has borrowed abroad. Since 2008, China has lent $12 billion to the country in return for oil shipments. Net public debt rose from 14% of GDP in 2008 to 29% in 2010, with an estimated 35% this year. Even with the unsustainable growth in debt levels, the government is unlikely to default with oil prices at or over $100/barrel. Funds have also been stashed away by the central bank (22.5 billion in cash and gold) and a separate, unaudited fund called “Fonden” ($39 billion). It is speculated that these funds will are being saved for 2012 when Chavez will be up for re-election and require some spending money.
Taiwan’s commonsense consensus
Since Ma Ying-jeou’s election as president in 2008, there have been 15 cross-strait agreements between Taiwan and China, including last year’s Economic Cooperation Framework Agreement (ECFA), an embryonic free-trade agreement. China and Hong Kong now make up 40% of Taiwan’s exports, and Taiwanese businesses have invested at least $90 billion in mainland China where some 800,000 Taiwanese live. Direct flights have commenced since July 2008, and 1.6m Chinese tourists visited the island last year. Mr. Ma’s political party, Kuomintang (KMT) has hoped to show voters the benefits that come from better ties with China. Last year, Taiwan’s economy grew by over 10% and reaped a $70 billion trade surplus with China and Hong Kong. China has also hoped that economic prosperity will win the hearts and minds of the Taiwanese and keep the KMT in power. Unfortunately, the plan does not seem to be working, as the opposition Democratic Progressive Party (DPP) recently won more votes in local elections. Support of unification with China “as soon as possible” is at the lowest levels ever, and more have called for independence. This has put Mr. Ma in an awkward position, balancing economic friendliness with China with political aloofness.
Very big ships: The Danish Armada
Maersk Line recently ordered 10 of the biggest container ships ever built to be delivered in 2013 (with an option for 20 more). The vessels will cost $1.9 billion and be built by South Korea’s Daewoo Shipbuilding. Each ship will be able to carry 18,000 boxes (2,500 more than the largest ships today), and require 50% less fuel per container. On February 23rd, Maersk announced profits of $2.6 billion for 2010 indicating a recovery in the shipping industry. Maersk projects global trade to grow by 6-8% with Clarkson’s projecting closer to 10%. Bulk carriers on the other hand (transporting coal, iron ore, grain, etc) have been hit hard due to overcapacity. The Baltic Dry Index shot up to 11,793 in 2008 causing many shippers to order more ships to accommodate China’s demand for raw materials. Overcapacity in ships led to a collapse with the index falling by 90% to 1,300. The container ship industry fared much better due to the industry’s consolidation, whereas the bulk-carrier industry is much more fragmented.
Oil and the Arab world’s unrest: Oil pressure rising
In the last month, Brent crude oil has risen from $96 to $115/barrel. Africa and the Middle East provide 35% of the world’s oil with Libya producing 1.7m of the world’s 88m barrels per day. Thus far, the price increase has not been a result of actual supply disruptions, but future expectations. The worry is that the region’s unrest will lead to another shock similar to the oil embargo of 1973, the Iranian revolution, or Iraq’s invasion of Kuwait. Recovering economies in the rich world as well as Asia’s growth spurt have led to a depletion of inventories with most global oil producers running at full capacity. The spare oil in the world rests with OPEC countries. If Libya’s oil stopped flowing, importers would look to Saudi Arabia, which could most likely plug the gap, resulting in little to no global spare capacity left.
Analysts at Nomura project that another halt from Algeria would absorb all remaining slack, resulting in oil at $225/barrel. The worst case scenario would be a supply disruption in Saudi Arabia itself, with unrest spilling over from neighboring Bahrain. The king this week announced $36 billion in benefits for the people to appease growing unrest. A shock to global oil supply could be weathered by rich nations depending on the extent and duration of the disruption. Current stockpiles in the hands of governments and industries are estimated at 4.3 billion barrels, which is equivalent to nearly 50 days of global consumption at current rates.
After suffering its own non-performing-loan bubble in the 1990’s, Japanese banks largely avoided the global subprime lending crisis. The country’s three largest banks are now flush with deposits with Mitsubishi UFJ currently the second-biggest bank in the world by deposits. Although the banks are profitable, they trail their global rivals due to having a domestic focus in a country with a dim economic future. Most Japanese firms are also cash rich, and when they do require financing, most do not turn to banks when, preferring to go directly to the markets. Retail banking is also in a slump with most risk-averse savers preferring cash or CD’s to higher yielding investments. With no other options, most banks have turned to Japanese government bonds which were recently downgraded by both Moody’s and S&P.
With bleak prospects in the domestic market, the banks have looked abroad. Nomura purchased the European and Asian arms of Lehman Brothers, Mitsubishi UFJ bought failed banks in the US to roll into Union Bank, purchase 21% of Morgan Stanley, and recently took over the project finance loan book of RBS. SMFG listed itself on the NYSE, allowing for greater ease in potential acquisitions, and Mizuho bought a 1.6% stake in Blackrock. They have also been active in expansion throughout China and the rest of Asia, forming alliances and hiring throughout the region. However, previous internationally forays have not ended will for Japanese banks. They are notorious for arriving late, paying too much, mismanaging, and leaving with losses. Other issues such as Basel 3 may also put a temporary halt on expansion plans, requiring “global systemically important financial institutions” to set aside higher amounts of equity to guard against potential losses.
