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By Tega Adeda, CFA
According to the Food and Agriculture Organization (FAO), global food commodity prices hit a six year high in December, led by an increase in the price of wheat, corn, soybeans and palm oil. This has now brought the subject of food security and protectionism in several countries to the fore. As mass vaccinations begin in developed nations and with the hope of a return to normalcy now gathering momentum, the cost of agricultural commodities is now on the rise, and the threat of food price inflation looms ominously. Central banks and governments across the globe have responded to the global economic crisis caused by the Covid-19 pandemic with a combination of monetary and fiscal stimulus with varying degrees of success. As we gradually see light at the tunnel of the pandemic, we could be walking into a different kind of crisis; one that cannot be resolved by printing currency bills but which has historically been solved by yet even much higher prices of food, which then helps to attract the supply needed. This has the potential to create a form of rationing as households react to rising costs.
Having just checked out of the Hilton hotel in downtown San Francisco, I had hardly driven a mile when I saw hundreds of homeless people all over the streets. My mind was puzzled! Is this the United States of America? This sight took me straight to the lyrics of a Majek Fashek song I first heard as a boy: “…the First time I came to New York, I used to think New York was like heaven on earth, I was surprised to see beggars on the street of New York”. Half an hour later, I arrive at The Bay. It costs me fifty dollars to park my car for the day. I head down to the beach and reminisce on my trip to Vietnam the previous summer, my thoughts lingering on a sight of the Vietnamese, breaking their backs on rice paddies in Hanoi. It hit me that beggars were absent on their streets and that the people simply got busy. My impression, rightly or wrongly, was that work was the way of life, the activity that gave energy to these people. I realized that living in the free and developed world is not an escape from the old menace of poverty and hunger; they persist and are on the rise.
Socialist Vietnam, the third largest exporter of rice after India and Thailand, suspended exports of the grain last March due to food security concerns caused by Covid-19. It later eased the policy, but that government policy makes it clear that countries will do their utmost to protect their own food supply before considering exports to other nations. Russia and Romania also put in place export restrictions on wheat in a bid to protect domestic supply after the pandemic struck. After all, what good does it do to have money and no food? The World Bank estimates that global poverty rates will rise for the first time since 1998 as the global economy contracts. They believe that “the ongoing crisis will erase almost all the progress made in the last five years”. Developed central banks and governments have thrown trillions of dollars at the economy while nationalism and protectionism, which have been on a steady rise before the pandemic, continue to take dangerous turns as nations and companies begin to review their global supply chains at a fast pace, keeping food security on the front burner.
The U.S. Federal Reserve has declared that they are willing to purchase “unlimited amounts” of bonds –in other words, print unlimited amounts of paper money to support the economy; I am yet to see a 3D printer that can yet print fruits or vegetables overnight. Now, the clear link between money printing and food inflation is well documented in history. A person doesn’t need to be an economist or have lived in 1923 Germany or 2007 Zimbabwe to understand the long term effect of money printing on prices of goods and food commodities.
Early in the sixteenth century, the economy of France was depressed and the government of Louis XIV was mired in debt. The Scottish gambler turned banker, John Law, was able to sell his grand economic idea of a Land Bank, where he was to issue paper money to the Duke of Orleans, who had become Regent of France after the King’s death. This issuance was backed by what was then considered real money: Gold and Silver. Hitherto, the French had never used bank notes or paper money. All was now set and the economy went into an upswing, commerce boomed and paupers became rich. The French word, millionaire is said to have been coined during this boom and it isn’t hard to see why it didn’t take long for hubris set in. Mr. Law began to issue more currency notes, this time, not backed by real assets. The money had to flow somewhere as always. Speculation set into stocks listed on the exchange, prices rose exponentially, fortunes were made. It could not go on forever, it was only a matter of time, frenzied speculation gave way to panic and in 1720, fortunes were lost. Paper money became worthless, precious metals and collectibles rose sharply, and the nation was back in debt, Monsieur Law was expelled from France. His experiment had lasted five years. Ultimately, inflation and currency depreciation follows unlimited credit expansion.
For the first time in history, corporations have now attained the trillion dollar status. In 2010, Exxon Mobil, then the world’s most valuable listed company, was worth around $350bn . A decade later and we have trillion as well as two trillion dollar listed organizations. Bitcoin, a peer-to-peer digital currency, has also risen in value to almost $700bn from as little as $1.5bn in 2013. The ease of financial trading has ushered in a new era of traders who see the stock market as a video game or some digital casino whose streets are paved with gold. As these rookies win some, they should think about the French millionaires in 1720 and remember the golden rule that the “house always wins”. Money is a medium of exchange which is largely based on trust; people will accept and hold it as long as they believe that its value will be maintained by the issuer. Tobacco, Whisky, Iron, Wheat, Cattle and all sorts of precious stones have had their day as money. The notion that people will always accept paper money without scrutiny or question is but a recent happening of the last century.
I was once told the story of a great farmer from my hometown who in his prime had planted rubber, cocoa and palm trees. Scientists from England brought seedlings to him to plant. At this time, one Nigerian Naira could buy you four U.S. dollars on the foreign-exchange market. He worked on a plantation of over four hectares using manual farm tools. At his funeral in 1978, after living for 105 years, a black Rolls-Royce phantom carried his body through the streets of Otovwodo-Ughelli, before he was laid to rest. Today, that land is not being cultivated but has been turned to a residential area. There is now a dearth of farmers, or rather a lack of interest in the pursuit. The wealth of farming experience is largely dissipated. In Africa, there is fertile soil, excellent weather and an abundance of labor. Many of the problems of food insecurity in Africa are largely self-inflicted ones. Globally, the average age of farmers remains very high.
There goes the swamp of desert locust, ravaging all our crops. We thought the harvest was going to be good this year then the pandemic came, forcing us to stay at home rather than farm. Perhaps we should just drink our tea and hope that the current floods don’t do much harm to the rest of our crops. Do not lose heart, my friends in Kenya; this too shall pass. Remain steadfast on the farm. We are told in the greatest book that “A man will give everything he owns in exchange for his life.” This includes the food he needs to sustain him and keep him alive. Similar to the late 1970s and early 1980s, this new decade will be a good reminder that the first occupation of man in this world was farming.
Tega Adeda, CFA
Emerging Markets Trader | Multi-Asset Trader | Global Financial Markets