Global food prices and the terms of trade
Agflation refers to a sustained increase in the general price of foodstuffs and in recent years we have become accustomed to seeing the prices of many basic staple products rising. The era of cheap food looks to be over for now on the back of significant demand-side factors, not least rising population levels, higher per capita incomes and speculative demand for foods as prices have become more volatile. Supply-side factors are also important in explaining strong inflation in food prices. Both sides of the market are discussed by Ambrose Evans-Pritchard in his column in the Telegraph today “Food will never be so cheap again” - plenty of applied microeconomics here in addition to the huge number of macroeconomic issues that the trend rise in food prices has caused. One of the big changes in a switch in the terms of trade away from food importers towards food exporters. But do higher food prices necessarily cause agricultural supply to expand?
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China’s growth starts to climb back above the 8% target
China’s leaders have set ambitious targets for economic growth - with an aim of reaching 8% growth of real GDP in 2009, a year in which world trade has shrunk and much of the developed world has been mired in recession. An enormous stimulus programme seems to be having an effect with the latest data showing a pick up in output and annualised growth of GDP climbing above 8.5%. Exports remain weak and many Chinese manufacturers are finding that the prices they are able to get from advanced economy importers continues to fall - the terms of trade have moved against them. Lifting domestic demand has become a key macroeconomic objective for the Chinese government. China has poured £354billion into spending on infrastructure in order to boost its domestic economy as exports have suffered.
This BBC news video reports on the latest Chinese growth figures.
See also
BBC: China economic growth accelerates
The Times: The dragon roars again after new figures put China’s output on a growth hat-trick
Paul Romer on Growth and Cities
BBC Radio’s Global Business this week sees Peter Day in conversation with Professor Paul Romer from Stanford University, Paul Romer is an expert in the causes of long run run growth and his current focus is on the economics of new cities in developed and developing countries. It is a programme well worth listening to, Romer is tremendously optimistic about the opportunities created by faster economic growth - especially growth built around innovation and appropriate rules systems.
read more...»Sugar prices and production and investment incentives
World sugar prices are close to a 30 year high with values on the Chicago mercantile exchange hovering just under $30c per pound. For countries whose sugar exports account for a large proportion of their export earnings, the steep increase in world prices has brought about an improvement in their terms of trade and - because demand for many foodstuffs is price inelastic, a favourable change in their balance of trade. A good example of this is the African country of Mozambique, a nation almost destroyed by a long running civil war that eventually ended in the early 1990s but which has also been hit in recent years by severes drought hit many central and southern parts of the country, including previously flood-stricken areas. And where half of the population must survive on less than $1 a day.
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Speculators and Exceptions to the Law of Demand
To what extent are speculators responsible for the increasing volatility of commodity prices? Expectations of price movements for globally traded commodities can have a huge impact on demand in the markets and the bets that speculators make on the forward prices of commodities such as oil can lead to rapid price hikes. We saw this with food and oil in 2008 - with enormous consequences for consumers and producers in developed and developing countries - and perhaps we are seeing this again as 2009 draws to a close. The world price of crude oil is already heading north again towardsa $90 a barrel.
This BBC world service audio report is a good resource on the impact of speculation and its possible links to exceptions to the law of demand where a rise in actual or expected prices can bring about an expansion of market demand.
“The International Food Policy Research Institute in Washington has studied price movements and concluded that they couldn’t all be explained by the fundamentals. And, perhaps most damning of all, a big-time speculator is now identifying speculation as one of the causes in the movement of the price of oil.”
Fair Trade given new push by government grant
Harriet Lamb the inspirational head of the Fair Trade Foundation is featured in this BBC news video that reports on a £12m grant to the organisation to help promote an expansion of the range of products that fall under the Fair Trade orbit. Welcome news indeed - Harriet spoke at our Economics Conference in June 2008 and listening to her and watching films like Black Gold convinced me never to buy another bag of non Fair Trade tea or coffee ever again if I could help it.
Ageing North Sea Gas fields increase import dependency
This article from the Times provides a timely reminder of the increasing importance of imported gas used in the gas-fired power stations that currently provide around a third of our electricity. Just a few years ago around 25% of gas was imported - now the figure is rising from countries such as Norway, Trinidad and Qatar.
“A spokesman for Centrica, owner of British Gas, said the UK’s ageing gas fields — many first tapped in the 1970s and 1980s — were no longer able to keep pace with domestic demand. “On the current trajectory we will have to import three quarters of our gas by 2015,” he said. Britain was still a net exporter of gas as recently as 2003 and was forced to import about 5 per cent of supplies in 2004 for the first time.”
The economy will become ever-more reliant on imports of liquified natural gas and sensitive to the impact of price volatility in the international gas markets. A gas cartel still looks a long way off, partly because most gas is traded on very long supply contracts and also because of the cost efficiency of transporting it and storing it around the world.
Britain was still a net exporter of gas in 2003, and was forced to import gas for the first time in 2004.
Are the Japanese the latest victims of a strengthening currency?
The Japanese Yen has hit an eight month high vs the US Dollar according to BBC news BBC News Article. This has prompted a lot of hand wringing from the Japanese ruling party and has sent share prices in Tokyo tumbling. But why should having a strong currency against the greenback equate to economic turmoil?
Cause and effect of the weakness of sterling
I do recommend this 4-minute interview to help explore the reasons for the weakness of sterling and whether it is helping the UK economy. Mark Thompson , a dealer at Moneycorp, was interviewed on Radio 5’s ‘Breakfast’ programme, and explained the shocks to the economy caused by the use of Quantitative Easing and the negative bank deposit rate (which means that if banks choose to hold money on deposit with the Bank of England it actually costs them money, rather than gaining them a return as interest). He sees these as strong statements that had been deliberately used to depress the value of the pound on the currency markets, thus encouraging exports and raising the price of imports, so that there is a substitution effect towards home-produced goods, which we can see is reducing the negative trade balance and so helping to raise the level of AD.
The link here will take you to the Friday 25th September episode of the programme, and should remain live until the end of this week; I think that after that it will be unavailable. Once you have opened the i-player page, use the scroll bar below the ‘control panel’ to move forward through the programme to 1 hour 48 minutes, which is the start of the interview.
Managing a global business in turbulent times
Over ten years at my current school I have been hugely fortunate to hear some tremendous speakers on a tremendously wide range of issues. Few have impressed me as much as Simon Henry, CFO of Shell plc in his talk to our Keynes (Economics) and the newly-formed Management Society last night. His talk was beautifully paced and considered; the responses to questions were candid and rooted in a deep understanding of energy industries where volatility has become the norm. Future shareholder value will depend largely on successfully breaking the cycle of volatility.
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