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The Reason Food Prices are Climbing- The Myth of a Shortage

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Headlined to H4 5/22/11

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What's the reason global food prices keep rising?

We witness a plethora of reasons for the rise of food commodities. Some have blamed transportation costs, others claim it's the money exchange rate, and there are even some who say its Bio-fuels. And of course the Chinese are on the blame list (they get blamed for almost everything). And, now the Middle East is being blamed.

Eric Pooley and Philip Revzin (2011) maintain that the rising food prices were the result of turbulent weather around the world. They state:

"The hunger that has roiled the Middle East was not caused by the whims of autocrats and cops. It began last year with crippling drought in Russia and later Argentina, and torrential rains in Australia and Canada. The deluges in Saskatchewan were so sustained and intense that farmers couldn't plant some 10 million acres of wheat, according to the Canadian Wheat Board. "What is typically the driest province was never wetter," said the governmental agency Environment Canada. Shrunken wheat harvests in those countries, along with cool, wet summer weather in the American Midwest that delayed the U.S. harvest, helped drive wheat prices at the Chicago Board of Trade up by 74 percent in the past year. Corn traded in Chicago rose by 87 percent during the same period. More recently, grain prices have spiked even higher because of yet another drought, this one threatening China's wheat crop, the worlds largest. In that country's eight major wheat-producing provinces, some 42 percent of winter wheat cropland has been hurt by a dry spell, according to Agriculture Minister Han Changfu."

  In their article they briefly mention that the rising price of food may also be a result of corporations making extraordinary profits by pushing the price of basic seed and fertilizer high. But this does not surprise me considering their article appeared in Bloomberg Business Week where executives and their corporations are treated with "kid gloves."

Several have claimed that rising food prices are the result of rapidly growing consumption of food. They claim the industrial growth in China and India has increased consumption. They say there is not enough food to go around and we have a fertilizer shortage brought about by the need to increase food production. However a UN report debunks this theory by claiming by 2011/12 the supply of fertilizer will increase by 21.2 percent while total demand will only increase 11 percent (UN, 2008). The fact is we have is an oversupply of fertilizer and still the price continues to grow. What about basic foods? Despite claims of bad weather the New York Times maintains there is no worldwide wheat shortage (Bowley and Martin, 2011). This is confirmed by reports from the UN and others suggesting there is no worldwide shortage, but in fact an oversupply. What one learns in Eco 101 is if there is an oversupply of a commodity the price goes down. Not true with these commodities. Despite an oversupply the price goes up.

So what's causing the price to rise?

Perhaps the answer is not what but who is causing the price to rise.

Let me suggest that it's not the bad weather or all these other factors that is causing food prices to go through the roof it's the greed of corporate executives and commodity traders. I am suggesting there is a direct link between CEO greed and the pain and suffering food prices are causing around the world. Much has been made of CEOs who engage in mass firings, who outsource and offshore, who steal billions from retirement funds, who flip companies with LBO's and engage in what has become the new America way to manage called "take the money and run." We now have yet another way these marvels of creative investing found to obtain riches. They have entered the food industry with gusto and reaped extraordinary profits by engaging in food price inflation and in the process leaving the poor, the fastest growing segment of the world's population, unable to feed themselves. Many commentators and analysts have suggested that part of the reason people are taking to the streets in Egypt, Ethiopia, Yehman, Tajikistan, Tunisia, Libya, Morocco, Jordan and other Middle East countries is in response to the rising cost of food. They have joined the poor from West Africa, Mauritania, Burkina Faso and Cameroon, along with Haiti and Bangladesh to protest because they are no longer able to feed their families. We also witnessed food riots and protests in parts of China, India, Bangladesh, Khartoum, Sri Lanka, and even Hungry.

The crisis is particularly egregious in Egypt where wheat sold for 2.5 Egyptian pounds per kilogram in January 2011 and in May 2011 is 3.5 Egyptian pounds, the same for tomatoes at 2 pounds per kilogram then, and in May 2011, 4 Egyptian pounds. This is a disaster for a country where 40 percent of its 80 million people live on less than 2 dollars a day with an unemployment rate estimated by some to be as high as 20 percent.   So they protest in the street and vent their collective rage by burning some Christian churches.

According to Brasher, (2011), some 44 million people have been driven into extreme poverty since June 2010 because of higher food costs, and another 10 percent increase in food costs would put 10 million more people into that category. Another 30 percent increase would lead to 34 million more poor. Extreme poverty is defined as living on less than $1.25 a day. Under these conditions the poor will not only engage in protests but also in waves of crime and gang violence to feed their families.

I maintain it is not the shortage or scarcity of fertilizer that is contributing to the high cost of basic foods around the world. It is the blatant greed of executives, bankers, and the hedge fund guys. Let's look at fertilizer.

Fertilizer

Let's begin by taking a look at the Potash Corporation in Saskatchewan, Canada.   In August 2010 this company was on the auction block and was offered $38.6 billion from BHP Billiton the world's largest mining company. Also the Chinese want a piece of Potash and so do other mining companies and of course the hedge fund managers. The stumbling block seems to be the Canadian government. Why so much interest? According to Murray Fulton, an economist at the University of Saskatchewan "What you have in the potash industry are a set of players that are able to control supply and price." (Austen and de la Merced, 2010).

Whoever buys the company for this outrageous price will incur heavy debt, and how will this debt be paid? By increasing the price of fertilizer and this is easily done when one is one of the "big players" who can "corner" the fertilizer market. These spreadsheet executives along with their hedge fund supporters will simply raise prices. Maybe that's why the Canadian government is resisting the sale.

Why is the Potash Corporation valued so high and worth more than $38 billion to these executives and hedge fund managers?   The money that can be made is alluring. The CEO of Potash, William Doyle, has stock options worth $600 Million, up from a meager $7 Million at the end of 2003.  Doyle's windfall reflects soaring potash fertilizer prices, up from $100 to $600 per ton. On October 23, 2008, Potash reported that it earned more in its third quarter of 2008 ($1.24 billion) than it did in the entire record setting year of 2007 ($1.1 billion). Doyle's total compensation in 2007 was $17,188,621 (up from $8,943,757 in 2006), including a $2.19-million bonus based on the company's performance. This works out to $47,092.11 a day.    According to Ebner (2008) "The soaring price of potash has made the top three executives who run Potash " fantastically wealthy, with stock options worth a total of $846-million." To make this even more absurd if Potash is taken over by another company Doyle will get a $400 million golden parachute and Potash will pay his taxes. These executives actually run the company from their offices in Chicago. There job is simple; pay miners peanuts to take the Potash out of Saskatchewan, put a price on it and ship it around the world and they get paid millions for this.
 
The actions of Doyle and his executives have contributed to the mounting worldwide food crisis by keeping fertilizer expensive.   The higher prices for all Potash Corp products, including potash, nitrogen and phosphate fertilizers, have contributed to the massive increase of some the most basic international food commodities. For example, consider the international market price of wheat: Between February 2007 and February 2008 the price of a bushel of wheat doubled hitting a record high of over $10 a bushel and according to the Labor Dept. between October 10th and January 1st of 2011 a bushel of wheat rose 15 percent. In July 2010 a metric ton of wheat cost $190 and over a period of six months that same ton cost $327.

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He has taught in MBA programs for almost 35 years in 2002 he left academe to work for Home Depot where he witnessed the absurdity of corporate life. He is now semiretired and serves on the faculty as an adjunct professor at several institutions. He (more...)
 
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As I understand it, the Commodity Futures Moderniz... by larry on Sunday, May 22, 2011 at 9:48:52 PM
A very nice article. In addition to the Stewart an... by Douglas Aerie on Monday, May 23, 2011 at 7:20:58 AM
Use cow or duck poop instead of megamillion dollar... by Odyseus_97 on Monday, May 23, 2011 at 10:34:41 AM
just follow the money, those who control the food ... by nativenezperce on Thursday, Jun 2, 2011 at 4:50:17 PM
A penny for wheat...and do not hurt the oil...... by Debbie S on Friday, Jun 3, 2011 at 1:30:27 AM
has done more harm to the soil then it has helped,... by nativenezperce on Friday, Jun 3, 2011 at 2:01:40 PM
It is a tragedyI even see neighbors pumping chemic... by william czander on Friday, Jun 3, 2011 at 2:39:00 PM