While the protests in Egypt are politically motivated, there is also little doubt that the rage of the populace there, as well as in Tunisia, Yemen, Algeria and elsewhere, is being inflamed by the huge and volatile increases in basic food prices.
While the seeds for huge percentage increases in corn, wheat, sugar, coffee and of course oil are based in some fundamental supply shortages, they have been unnecessarily hypercharged by the influx of investor money, speculative energy and the panic of governments trying to stockpile basic foods and quench the growing hostility of its people.
We've seen this movie before, in 2007-2008, but it hasn't looked nearly as bad as this. Massively spiking commodity price inflation, before the global financial collapse, was a far easier problem to find solutions for and contain. Now, with practically all Western governments in the midst of austerity budgeting, less money is available to help Middle Eastern and other emerging nations find adequate and subsidized supplies.
But this movie rerun is in widescreen Technicolor: the across-the-board food price increases have never seen this kind of spike before, ever.
Wheat is up 75% in the last 12 months, corn up a little more. Coffee is up 85% and cotton a spectacular 140%.
While flooding in Australia, a drought in Russia and weak harvests in India and China are the fundamental drivers for this upwards trend, there is little doubt that investors and traders looking to diversify and capitalize on the supply shortages are moving these prices much more significantly and faster. Commodity index investment increased an estimated and whopping $80B dollars last year, bringing total long-only commodity index investment to $350B, according to Barclays. Another $30B of commodity ETF investment is also overwhelmingly long-only, as short commitment in these instruments is normally well under 5% of float.
Financial buying of commodities in indexes and ETF's, with the speed that these instruments operate, overwhelm the futures mechanisms and cause much greater volatility and overall higher prices. We've seen this roller coaster ride play itself out once already in oil, moving from 2005-2008 to $147 a barrel, only to collapse to $32 dollars in March of 2009, before re-initiating its upwards trajectory.
Whether financial investment in commodities can be absorbed by a free market or not, this kind of boom/bust cycle, now playing itself out again in other critical foodstuffs, is intensely destabilizing and threatens the order in brittle governments around the globe.
And governments have been forced to play into this struggle. Increased stockpiling of basic commodities has added to the frenzy of price increases: Algeria and Saudi Arabia have doubled their usual stockpile of wheat, Bangladesh and Indonesia have tripled orders for rice.
The mechanism for halting, or even slowing down the massive money flows into financialized commodities is lacking. Small steps on position limits and transparent clearing, mandated under Dodd-Frank legislation, have seen widespread pushback from industry advocates and trading companies. Rules for the energy markets, mandated by Dodd-Frank to be in place and operating today under the Commodity Futures Trading Commission (CFTC), are at least another year away, if they are coming at all. Very little looks to be changing.
And with very little changing, we might have to get used to these street scenes in Egypt and other emerging nations elsewhere, as rage from native populations spills over from the spiking prices of simple food basics.
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