Vincent Kolo, chinaworker.inf
Leaders fear inflation-driven revolts spreading beyond Middle East and North Africa • Financial speculation driving prices upwards
“It’s really something that can topple regimes, as we have seen in the Middle East.” This is the warning from economist Nouriel Roubini, discussing the surge in prices for fuel, transport and especially food, at last month’s World Economic Forum in Switzerland. Roubini was just one of many voices at the annual capitalist gathering who warned that rising food and energy costs are fanning political unrest and could push the global economy back into recession.
A similar warning was issued by economic columnist Paul Krugman in the New York Times (6 February). He called food price rises an “important trigger for popular rage”, adding that the climate crisis is an important factor: “The evidence does, in fact, suggest that what we’re getting now is a first taste of the disruption, economic and political, that we’ll face in a warming world”.
A record drought in Russia last year, which led its government to ban wheat exports, marked the start of the present wave of food price hikes. Flooding in Canada and Australia, both key agricultural producers, followed by the worst drought for at least 60 years in northern China (see box), have also been factors driving global prices for grains and other farm produce higher. China is the world’s biggest wheat producer and consumer. The frequency of such “extreme weather events” – last year was the warmest on record – underlines the dangers ahead unless the deepening climate crisis, an inevitable result of capitalism’s destructive role, can be addressed.
World food prices hit a record in January, even higher than the levels seen in 2008, when the last food crisis sparked mass protests and rioting in more than 30 countries from Mauritania to Indonesia. Wheat prices have risen 76 percent in the last year, corn 88 percent and soybeans 47 percent. The UN Food and Agriculture Organisation (FAO) warns agricultural commodity prices may rise by a further 20 percent this year. The effects are already being felt around the world. The FAO put the number of hungry or malnourished people worldwide at 925 million – three times the population of the USA.
The World Bank says rising prices have driven a further 44 million people worldwide into “extreme poverty” since June 2010. Food price inflation has been an important factor in the revolutionary upheavals in Tunisia, Egypt, Yemen, Bahrain and other parts of the Middle East and North Africa.
The Japanese bank Nomura has compiled a list of the 25 countries most at risk of instability as a result of soaring food costs. The list includes Tunisia and Egypt, where dictators have already been toppled by revolutionary movements. Also on the list are Morocco, Nigeria, Lebanon, India, Pakistan, China, Hong Kong and Vietnam. In China, food accounts for 40 percent of household consumption, while in India the figure is almost 50 percent. North American and European households, by comparison, spend just over a tenth of their budget on food.
But increased poverty in the wake of the worldwide “Great Recession” means that even advanced capitalist countries are not immune from the political fallout from rising food prices. Shanghai-based economist Andy Xie, citing a US poverty rate of 14.3 percent and record numbers without jobs, noted, “Some 50 million Americans are not so different from the Egyptians in their economic plight.”
India’s food inflation jumped to 15.7 per cent in January from 13.6 percent the previous month. India began importing onions from Pakistan, and imposed a de facto embargo on exports of this staple ingredient, after prices soared 80 percent primarily due to crop failure caused by heavy rains in the south of the country. Commentators are warning food price inflation can be a key factor in coming elections in two important states, West Bengal, where the Communist Party of India (Marxist) is facing a serious challenge to its over 30-year grip on power and Tamil Nadu.
In China the official rate of food price inflation is 10.3 percent, but many believe this understates the true position. In January, grain prices rose 15.7 percent over a year earlier, fresh fruit by 34.8, and eggs rose 20.2 percent, according to the National Bureau of Statistics. Also battling runaway speculation in the housing market that has been fuelled by a wave of bank-driven liquidity, the central government has raised interest rates three times in four months – most recently during the Lunar New Year festival earlier this month. “The government is battling with all sorts of problems coming from every front,” commented Standard Chartered economist Jinny Yan. “The peak of inflation is yet to be seen.”
Such is the grip of inflation in big Chinese cities, that mainland Chinese from Guangdong province are now flocking to Hong Kong, previously much more expensive, to shop not for luxuries but for staple goods. Beijing, where median household incomes are only a third of Hong Kong’s level, is now a more expensive city for most daily necessities including a kilo of bananas or a bowl of beef noodle soup. McDonald’s ‘Big Mac’ – widely used as an international comparison of prices – costs almost 1 yuan more in Beijing than in Hong Kong. The influx of mainland Chinese shoppers has resulted in an anti-mainlander backlash from some layers of the Hong Kong population, whipped up by chauvinist sections of the local media. In particular a run on Hong Kong milk powder has led to shortages. Milk powder is often top of the list for mainland parents visiting Hong Kong, in the wake of successive tainted milk scandals in China that have contaminated 300,000 infants and killed eight.
The ‘food crisis’ is rooted in modern capitalism and its brutal subjugation of all parts of the globe to a world ‘market’ ruled by parasitical financial corporations. Many factors are at work such as population growth, faster urbanisation, loss of farmland, growing meat consumption in China and India, climate change and a surge in biofuel production. But these economic, social and environmental changes are exacerbated by rampant speculation in commodities. The speculative tendencies inherent in the capitalist economy have been amplified by the injection of massive liquidity into the financial system as a result of the zero interest rate policy and ‘quantitative easing’ of the US government and central bank.
It is not the case that there is a shortage of food worldwide. Current levels of agricultural production are enough to provide each and every human being with 4,600 calories a day, well above the average requirement of 2,600 calories a day. It is rather the global trade in farm products and the manipulation of this trade by powerful capitalist speculators that has created the crisis. Like every other aspect of modern capitalism this trade has become ‘financialised’, with the innovation of complex financial instruments and so called ‘derivatives’, and it is this almost completely deregulated trade in derivatives that is a major cause of recent price increases. Once again, the problem of problems is capitalism and its financial parasitism, which continues to wreak havoc despite all the politicians’ talk about “reforming the system” in the wake of the 2008 banking meltdown.
In its warning of a new food crisis, the FAO called for rules against speculation in commodity futures markets. This is because speculative investment in these commodity-linked derivatives, more than the economic fundamentals of global farm output, is driving prices higher. The problem is that even if capitalist governments can be pressured into adopting such rules, as the FAO proposes and also the Group of 20 (G20) has pledged “to discuss” at a coming summit, these will in most cases be circumvented by the banking giants that do most of the speculating. This is unless the banks along with other major companies are placed under democratic public ownership and control.
The Standard & Poor’s GSCI Agriculture Index of eight farm commodity futures rose 44 percent last year – the biggest advance since 1974. The big banks and hedge funds are gambling furiously with futures, placing bets on the price of commodities such as wheat and soybeans at a given point in the future. The falling dollar as a result of US ‘quantitative easing’ drastically increasing the amount of dollars in circulation, has set the speculators chasing after higher yields from alternatives to the dollar such as oil, gold, but also farm products. This has pushed up the food bill for ‘food-deficit’ countries such as Egypt, which is the world’s biggest wheat importer. UN figures show that low income food-importing countries were forced to pay up to 20 percent more last year than in 2009 to cover their import bills.
Far from subsiding in the aftermath of the banking implosion of 2008, speculation in derivatives involves even greater sums of money today. While most media analysis portrays the speculators and ‘financial sharks’ as shady, anonymous forces, in reality the main perpetrators are household names – the same Wall Street banks whose fingerprints are found at almost every economic ‘crime scene’. The trade in commodity derivatives currently totals around 9 trillion US dollars ($9,000,000,000,000) annually, with over four-fifths of this in the form of ‘over-the-counter’ trades that are wholly outside any statutory regulation. Just five banks account for 96 percent of this derivatives activity. Whereas ten years ago the non-commercial (i.e. purely speculative) actors stood for around a fifth of this trade, today their share is four-fifths.
Threat to global ‘recovery’
Due to the insanity of capitalism, for which any attempt at real planning is anathema, the disruption in agricultural markets is not only an important factor behind the revolutionary upheavals that are reshaping the global political landscape, but also endangers the shaky ‘recovery’ in the global economy.
China, India and other Asian governments are wrestling with inflation, much of which has been exported by the US central bank through its cheap dollar policy. The Reserve Bank of India (RBI) raised interest rates in January for the seventh time since last March, warning of stronger inflationary pressures. China’s government is following a similar tack, with further rate rises and increases in banks’ reserve ratios likely in coming months following two years of unprecedented credit expansion.
The fear that India and especially China, the world’s fastest-growing large economies, will suffer economic slowdown as a result of these ‘quantitative tightening’ policies has spooked the global speculators. The IMF estimates that every 1 percent drop in China’s GDP would reduce the rest of the world’s GDP by almost 0.5 percent. This is because of China’s decisive influence on global commodity prices as the main market for energy and minerals, not just its role as the world’s second largest importer of goods.
Why are global food prices rising?
Millions more face hunger and hardship for the following reasons, all ensuing from the capitalist mode of production (which puts profits rather than needs at the centre):
Land grabs: Every year an area equivalent to France’s total farmland is bought up by multinationals or foreign governments to grow food for export, rather than the local population. Africa is the focus of this “agro-imperialism.” An estimated 15-20 million hectares of farmland (equivalent to the territory of Tunisia) has been bought up foreign investors – mostly oil-rich Gulf states, but also China and India, since 2006 (IFPRI).
Slowing farm productivity gains: The 1970s witnessed a ‘green revolution’ in agriculture with new strains of rice and other improvements leading to vastly increased yields. But the pace of gains has slowed and the amount of cultivable land is shrinking due to urbanisation and environmental destruction. In China, soil degradation due to excessive farming methods and over reliance on chemical fertilisers has created a blighted landscape and huge environmental problems. The latest reports that ten percent of all rice sold in China is contaminated with heavy metals including lead and cancer-causing cadmium, is only the latest in a seemingly endless stream of food safety scares in China.
Climate crisis: Catastrophic storms and droughts have battered leading agricultural countries in recent months, including flooding and a severe cyclone in Australia and extreme winter weather in the United States. Last year saw unprecedented floods and one of the worst humanitarian disasters in living memory in Pakistan. National Geographic magazine reported that one factor in the increased incidence of severe flooding is the speeding up of the world’s water cycle as a result of global warming. Research by NASA and university researchers found that rivers and melting ice sheets delivered 18 percent more water to the oceans in 2006 than in 1994.
Biofuels: Production of biofuels consumes ever greater planted areas. Almost 40 percent of the maize harvest this year in the US, the world’s biggest food exporter, will go to the production of biofuels instead of food. A full tank of ethanol in a SUV uses enough maize to feed one person for a year, according to the World Bank. Despite the fact that biofuels are not ‘green’ – in most cases cultivation techniques result in more greenhouse gases – their usage is projected to soar from 1 percent of road transport fuels in 2005 to 25 percent in 2020. The economics of biofuel is also distorted by government subsidies, for example in the US, that induce farmers to switch from food production.
Oil prices: Global oil prices are around $100-a-barrel, driven by higher consumption in Asia but to an even greater degree by speculation. The role of the speculators is highlighted by the recent oil price hikes while Egypt was experiencing its incredible 18-day mass revolt against the rule of Hosni Mubarak. Egypt is an oil producer, but a small one. It’s output accounts for just 0.8 percent of global oil production.
Increases in oil prices affect the cost of food production and transportation as well as fertilisers. A high oil price also makes biofuels a more profitable alternative. But oil is also a key ingredient in commodity speculation that acts to drive up prices for other commodities including farm products. The commodity index funds (baskets of several different commodities futures) managed by big banks such as Goldman Sachs, which dominates this trade, are heavily weighted towards oil and fuels, with farm goods typically only comprising a tenth or so of these funds. When the oil price rises it increases the value of the funds, which in turn acts to push up the price of other futures including food.
The latest ‘food crisis’ is therefore in reality yet another crisis of the capitalist system, like the banking crisis, sovereign debt crisis and climate crisis. As Marx explained, capitalism creates its own ‘grave digger’, and we see this with the explosive revolutionary movements that ushered in the new year. These movements, as they spread and deepen, must be equipped with socialist policies to replace the insane wastefulness of capitalism with a system of democratic planning of the world’s resources by the working classes, to obliterate poverty and hunger.
Drought in northern China
Severe drought in northern China, the world’s largest wheat-growing area, is raising further concerns about supply in China and its effect on global prices. The UN food agency warns this may become a “serious problem” if shortfalls in China force it to turn to imports. Again the speculators have lost no time, with wheat futures trading at a record on the Zhengzhou futures exchange.
The drought affects 7.2 million hectares of wheat-growing country in Shanxi, Shandong, Hebei, Henan, Anhui and Jiangsu, the six provinces that produce four-fifths of China’s wheat crop. Until last week, there was no rain or snow for 108 days in the region. In Shandong, the second major wheat producing province, this is the worst drought for 200 years. 300,000 people and millions of head of livestock are without drinking water in the province.
Last week saw light snowfall following ‘cloud seeding’ (shooting up silver iodide) by authorities, but this has not eased concerns about the winter wheat crop. The government has earmarked over 6 billion RMB for fighting the drought, including emergency well drilling and irrigation measures and support for farmers. In Shandong, hoarding has begun, with several wheat stations closed amid reports that farmers are refusing to sell their crop in anticipation of higher prices ahead.
China has more than 50 million tonnes of wheat reserves, which mean that the situation is manageable short-term. But if drought conditions extend into March and April, the situation could become acute. The State Council (China’s central government) warned that rainfall across northern China would remain “persistently below normal levels and major rivers will continue to be generally dry.” These freak weather conditions, part of a wider climatic problem, are exacerbated by unsustainable farming methods, insufficient irrigation and poor rural infrastructure that have led to desertification and a depletion of underground aquifers throughout the dry north of the country.