With a third Fed rate cut, we can hope for a rebound in global growth. A constraining factor here is Chinese inflation – which needs to be watched in light of soaring pork prices. Higher inflation constrains policy makers and, as recent history has shown, can produce a very difficult socio-political environment.
Indeed, there is a long-lasting link between food prices and the unrest that dates back to and beyond the French Revolution. More recently, in 2007, as volatility in dollar and commodity prices marked the onset of the global financial crisis, a surge in (agricultural) commodities caused unrest in countries as diverse as Haiti, Mozambique and Bangladesh.
Then four years later, a surge in the prices of cereals and other foodstuffs catalyzed the Arab Spring, especially in Egypt which is very vulnerable from the point of view of food security. Some countries in the region, such as Kuwait, have avoided this unrest by introducing subsidies and subsidizing food consumption for more than a year.
The case of the Arab Spring highlights two other factors, both also present in countries like Venezuela today. First, rising food prices are often the “last straw” for citizens of poorly managed, corrupt countries, suffering from poor institutions and often also oppressive. Second, in many of these countries, such as in pre-revolutionary France, basic food items like bread represent between one-third and one-half of discretionary spending.
This has been the case in India in recent years, where spikes, or more accurately bubbles, in onion prices have led to political unrest. For example, in mid-2013 the price of onions quintupled, partly due to shortages, partly due to build-up. Similar and dramatic spikes have occurred for garlic prices in China.
Since this period (2012-2013), world food prices have fortunately been stable, according to the FAO World Food Price Index. One area of recent turbulence in China is pork prices worth watching. Swine fever has led to a sharp rise in pork prices, which, as food accounts for around 30% of China’s inflation basket, has pushed the CPI (consumer price inflation) to 3% , close to its peaks of the past eight years.
Although China is not at all as fragile as Egypt, the surge in pork prices, if it persists, will have a number of short and long term macroeconomic impacts, one of which is that of China. might not have the demand for the $ 20 billion or so. of soybeans that it has committed to purchase from the United States.
Chinese consumers will feel more constrained and the rise in prices, in a context of falling property prices, will contribute to a feeling of “squeeze” (remember the expression “squeezed middle” (class) in England). At the same time, higher headline inflation makes it more difficult for the People’s Bank of China to mitigate the weak economy through rate cuts.
Soaring pork prices are also a reminder of how central food is in geopolitics. China, although large, has a relatively small mass of arable land and in the future will have to import more food and try to buy land or agricultural facilities in other countries. Other food “vulnerable” countries are India, Indonesia, Democratic Republic of Congo (DRC), Bangladesh, Pakistan and Ethiopia. Global warming and declining water supplies in many of these countries may mean that food security is becoming an even more acute risk factor.
In contrast, the United States has vast tracts of farmland, much of which would be used for food if it weren’t for the ethanol subsidies. In the future, he could use food in a much more strategic way.
In the shorter term, the investment impact of rising pork prices is to make Chinese consumers more nervous, to force policy makers there. This means that demand for hard commodities like oil and copper will be reduced, Chinese interest rates volatile, and foreign food producers more attractive.