Federal Reserve Ignites Food Panic

Lots of articles have recently come out about food shortages, riots, and rapidly climbing prices. Last August the Federal Reserve and European Central Bank started lowering interest rates, pouring liquidity into the world marketplaces, and trading prized treasuries for near-worthless debt. Food riots and central bank maneuvers are more closely linked than you might suspect.

Here's a selection of recent headlines about world food shortages, prices spikes, and hoarding that I've been gathering for a couple of months.

I want you to think very carefully about how rapidly this food situation began and morphed into a situation where nations began hoarding food. I want you to consider this because I have the same concern about oil. That is, once a slight shortage is openly felt in the marketplace, the time between normal trading of goods and hoarding can be a matter of days, if not hours.

Below, in the registered section, I will draw the connections and make the case that all of this began on August 16th, 2007 with the Fed's move to cut the discount window interest rate. Meanwhile, Wall Street parties on.

Rising Grain Prices Panic Developing World (Wash. Post)

(April 4, 2008) SHANGHAI -- A spike in the price of rice and other food staples is triggering consumer panic, including food riots in Yemen and Morocco, and hoarding in Hong Kong.

Governments around the world have taken radical measures in recent weeks to control their countries' supplies of rice. Egypt last week said it would ban all rice exports for six months. Cambodia has stopped all private-sector exports of rice, and India and Vietnam also have imposed restrictions.

Egypt's Rising Food Prices Swell Bread Lines (Bloomberg)

(April 9, 2008) ``We have seen riots around the world and there's risk that these will spread because of rising prices in countries where 50-60 percent of incomes go to food,'' Jacques Diouf, the director general of the United Nations Food and Agriculture Organization, said in India today.

Record high grain prices have led to strikes in Argentina, riots in Cameroon, Burkina Faso, Morocco and the Ivory Coast. The World Bank says 33 countries from Mexico to Yemen may face social unrest because of spiraling food and energy costs.

Rising wheat prices have far-reaching significance

(March 1, 2008) Food prices, though, reflect more than just increased demand. Rising prices for other commodities can have a compounding effect on food. Higher energy prices, for example, add to production and shipping costs.

That, in turn, can have grave implications for world health. For example, the U.N. found that the cost of food imported by the world's neediest countries last year rose by 24 percent, to $107 billion, raising questions about nutrition.

'Panic' wheat buying across the US

(February 26, 2008)Panic over commodity shortages continues to emerge as the dominant factor in the global markets, with both end user and speculative buyers of corn, soybean, cotton, rice and a host of other commodities taking note of what’s happening in the wheat pit.

The net result has been declining stocks at the same time that expanding global wealth has demanded more raw commodities.

The net result on Monday was new all-time record high prices for corn, soybeans and wheat on the same day.

Sentiment in the marketplace is changing from, 'buying just-in-time' to one of, 'buy what you need at any price' and then to 'buy even more to restock the shelves'.

In other words, there’s evidence to suggest that we’re beginning to enter the hoarding phase of the inflationary cycle.

Wheat prices could defy a recession

(February 21, 2008) LONDON The global market for cereals looks well placed to withstand a U.S. recession, its resistance bolstered by climate change and new dietary tastes in rapidly developing economies.

Declining water tables and unpredictable weather in major production areas have hit crops, and much arable land has been diverted to producing biofuels. Meanwhile, consumers in emerging markets like China are eating more meat as they become wealthier, driving demand for animal feed.

These factors are not likely to go away soon, even as general economic conditions worsen.

"It is mostly driven by world population growth, which is about 75 million people per year, and also by the more protein-rich nutrition trend in Asia," said Jochen Hitzfeld, a commodities strategist at Unicredit in Munich. He predicts a 50 percent rise in wheat, with prices to average $15 a bushel in 2009.

The trend, in fact, is not a new one. In seven of the past eight years, demand for wheat has been greater than supply, according to Unicredit, though so far that demand has been met by drawing down existing stockpiles.

The poor of the world are getting increasingly priced out of their daily bread. Literally. For many, this is a true disaster, and the wealthy nations are largely to blame.

Not because we are consuming any more than we used to, but because our central banks were scared by what they thought might happen if the big banks of the world were allowed to take their lumps for making their ill-advised gambles on the housing market.

There are three dates I want you to remember as you view the charts below. August 16th, the date of the first Fed rate cut (to the 'discount window'), and January 22 & 30, two sets of cuts to the Federal Funds rates of 75 and 50 basis points, respectively.

Now, let's look at some charts. To help you out, I've circled those dates for you.

This first chart is of ALL commodities. That's oil, grains, metals, and fibers. The second chart is wheat, while the third is rice. As you look at them, notice what happened after each set of rate cuts.

I see a very clear and immediate connection between the rate cuts and the explosion in commodity prices. Of course, this should not have been a surprise to anybody at the Federal Reserve, since hot commodity prices and easy money have a long relationship with each other.

This is a companion discussion topic for the original entry at https://peakprosperity.com/federal-reserve-ignites-food-panic-2/