China, India and Food Prices

Well, what a year has it been! Begin January 2009, and foreign investors were ready to pull out money, de-leveraging their positions, going into their shells. Everyone was "playing safe", and money was becoming expensive, and scarce. To counter that, interest rates were lowered, bail outs were carried out, and in what scale. Then, as money became cheaper, it became abundant, "in every rich man's pocket". That money was cheap, borrowed at dirt cheap interest rates. When money becomes cheap, it goes places- it goes everywhere. One of the places it went, was commodities. Food prices soared, with a definite support (in India- the debated MSP) And the double whammy was bad monsoons.

The bad, and irregular monsoons meant less supply to a hungry lot of a billion people in India. Food prices were going to increase, as indicated by their futures- and they did. Now, India is talking about importing food items. That has the capacity to send enough speculation in the international market to keep the prices up. The price elasticity itself has been tampered with. Oh, and did the farmer benefit? No. They had not much to sell- well, most of them didn't. Their crops were doomed, and on a lighter note, so was deflation in food prices! And of course, that did not and will not save the economy! It has been lack of supply, and so it should be increased supply that would solve the problem. But then, when the economy improves and starts creating jobs at a faster rate, when the purchasing power of more than a billion people in India and roughly two billion people in China increase, they would certainly buy more food- that is sufficient for them, or more than sufficient for them. And when the per capita food/related consumption reaches the level of USA, that would send the food prices flying into the never ending sky. This can only be softened by a proportionate increase in food supply- and both the countries become self sufficient. In other words, a Malthusian catastrophe has to be averted.

Then comes China, and its obsession with a weaker yuan. There are two cases here- either China lets the yuan appreciate against the dollar, or it maintains status quo. In the first case, China would start offloading its US Treasury portfolio (if it gets irritated!), and start selling the dollar. When that would happen, interest rates would have to go up- but when there is an already large amount of cheap money lying around, that wouldn't make much of a difference. The size of the cycle, as we say, would increase, and the next bubble would be humongous. That would be due to the second chance given to a failed US-styled free movement of funds, in the same tax havens, and more liberty to greedy punters in the commodities futures, and more expensive food. But then, in a capitalist economy, people argue, this is good. But then, China has to let things be, freely, free. The economy at its core is a free economy, which takes care of itself.

In the second case, if China maintains status quo- which it shouldn't, the dollar remains strong when it shouldn't. China has that "geopolitical" advantage, which it really doesn't, and it continues to spoil the world markets with its cheaper substitutes. This has to phase out quickly, if equitable distribution of global wealth has to ensue. Now, if China has been a gainer, it has to show it in its currency as US did. And, the world has to stop thinking about things as they used to be and start thinking about what they will be in the future. China can be the new US, with its large trade surplus, if it follows true capitalist rules (which i doubt), and Shanghai is allowed to become a financial center like New York, with lesser constraints. But then, that takes time, and a lot of stomach to change ideologies. China has to care for its billions, and it's doing that all right, in the left way, which is the wrong way!

To sum it all, food prices are going to remain high, if the supply side is not taken care of- which would be very difficult in the long term because of the Malthusian catastrophe. The purchasing power has to increase, along with employment in the emerging markets. The focus in the next decade would be seen to shift from the US and the Euro zone to Asia and South America, with the capitalist American's help.