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According to United States Bureau of Labor Statistics, the cost of a gallon of milk has increased 17% and a dozen eggs have jumped 40% in the last year and a loaf of bread is up 30% in the past two years. At the gas (petrol) pump, the national average for regular gasoline notched a record $3.63 a gallon in early May, double from 2005, and it looks set to break the $4 barrier this summer.
The Commodity Futures Trading Commission (CFTC) held hearings on April 22 examining why agricultural commodity prices are skyrocketing. It noted, “In the last three months, the agricultural staples of wheat, corn, soybeans, rice and oats have hit all-time highs.”
One of the main factors in accelerating commodity and food costs is financial speculation. One analyst estimates that “investors have poured roughly $175 billion to $200 billion into commodity-linked index funds since 2001.”
During the CFTC hearings, commodity producers blamed speculators for soaring prices. If there is a main culprit, it is the market. There is a lot of talk about growing consumption and falling supplies for both food and energy, but most of the data contradicts these claims.
The Inflation Equation
In the US, for years government officials have been declaring soothingly that inflation is “under control.” The government reports that consumer inflation has been around 2-3 percent for the last 10 years and has jumped to almost 4% in the last 6 months. Some economists claim the real inflation rate has been above 8% for the last decade and is closer to 12% at the moment.
Many reasons have been given for rising commodity and food prices: diminishing inventories of grains, greater consumption of animal products in Asia, a growing global population, global warming, biofuels, natural limits, financial speculation, the falling dollar, escalating crude oil prices, World Bank and IMF policies, hoarding, etc. Broadly, the nature of the globalized economy -- the role of financial speculation, the dumping of subsidized foodstuffs from Western farmers in poor countries forced to “liberalize” their agricultural sectors, the declining dollar, and the overheated oil market -- is the reason why prices are shooting up. What ties all these factors together is politics.
“Population problem” is also a major reason why commodity prices are rising. And it's limits imposed -- such as biofuel production and speculation -- that are behind the global food crisis.
Also, China and India, with their booming economies, are held as culprits for the rising demand and thus shrinking supplies of food and energy supplies. India and China's population and caloric intake is increasing. But this is a decades-long trend. There is no way that steady growth over 20 or 30 years could cause commodity prices to double in a year or two.
The biofuels industry has been eager to blame China. The same strategy of blaming China and India is being used to hang the energy crisis and global warming around their necks. China and India use about 10 million barrels a day of petroleum products. But that's half the US consumption of 20.6 MBD and they have nearly 8 times the population between them.
With the rise in oil prices, there has been a boom in biofuels like corn-based ethanol. The price of wheat has skyrocketed, boosted by the weak dollar, falling supplies, and speculation. The price of soybean oil is also increasing, partly because of its use for biodiesel.
The Oil Factor
Rising energy prices are a major factor in the escalating costs of agricultural products. Oil prices have almost quintupled since 2002. There are three main explanations: supply and demand, speculation, and the US government's monetary policy. The White House and many pundits point to supply and demand as a major factor. So, China, India, and the rest of the developing world are held responsible. China's and India's consumption is rising rapidly, as is that of Middle East countries awash in oil. But from 2002 to 2006, even as oil prices tripled, global oil production kept up with demand by increasing 7.6 million barrels a day to 84.6 MBD. Demand growth has also slowed to a 1.1 million barrel per day annual increase from 2005 to 2008. This is compared to a 3 MBD increase in 2004 alone.
There is also an issue of “excess capacity.” The cushion between production and consumption has fallen dramatically in the last six years, which has created supply hiccups and higher prices. The cause is US foreign policy. The Bush administration has destabilized three major oil producers -- Iran, Iraq, and Venezuela.
The Great Rice Panic
There is no explanation for why all commodities are rising in price. As the world's workshop, China creates demand-driven inflation for various industrial commodities. In contrast, since the end of 2007, the price of Thai B grade rice doubled to $760 a ton by March-end and then hit $1,080 weeks later. The reason for the initial rise is attributed to various supply and demand causes. But speculation is driving these huge price leaps here, too. Essentially, all parties involved in the rice trade are engaging in fear-induced speculation. Major rice-exporting countries like India, Thailand, and Vietnam are limiting exports to ensure the domestic market is satisfied, thereby constraining supplies for rice importers.
All this panic and speculation feeds on itself. Absent a global famine, normal demand or supply issues cannot explain why rice prices have tripled in Asia in just a few months. (Source: Indypendent.org)
July 1, 2008
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