On November 4, 2010, Art Steinmetz, Chief Investment Officer at Oppenheimer Funds, who helps oversee $52 billion in assets, said in an interview, “The quantitative easing that the U.S. is doing is putting far more pressure on China to adjust their currency than the loud-mouthed Congress. Clearly, the negative effects of linking the two currencies are going to start to outweigh the positives from the Chinese standpoint.”
One week later, November 11, 2010, Axel G Merk, founder and portfolio manager of Merk Investment, in his article The Dollar: Every Man For Himself, said, “QE2 is akin to the Fed placing a gun to China’s head, telling them to revalue their currency.” And so it seems. However, what is widely perceived as a U.S. assault toward Chinese-yuan revaluation is regretfully wreaking havoc on resource-poor countries, as waves of U.S. dollars, via the Federal Reserve’s quantitative easing campaigns, flood international commodity/food markets, causing agriculture prices to soar.
As expressed in a speech by Fed Chairman Ben Bernanke at the recent G20 meeting, saying observers argue the Fed’s large-scale asset purchases are linked to food inflation, the Chairman cited “concerns” that “capital flows to many emerging market economies...put upward pressure on their currencies, boost their inflation rates, or lead to asset price bubbles.” Going further in an address to the National Press Club earlier this month, February 3, 2011, the Chairman consented that QE2 has “led to higher stock prices”.
With regard to commodities, in a January 28, 2011, CNNMoney report on food inflation, Annalyn Censky wrote, “In December, international food prices broke an all-time high when they rose 25% for the year, led by rising costs for staples like rice, wheat and maize (corn), the United Nations reported.”
Since May 2010, corn is up 85% from its May monthly average; wheat is up 88%; and soybeans are up 51%. The IndexMundi Commodity Food Price Index on a monthly basis is up 30% over the same period as liquidity flows to where opportunity is best.
Indeed, food prices in India rose 18% year on year; Egypt 17%; Indonesia 16%; and in China 10.3% on a 15.1% rise in the cost of cereal, 20.2% rise in the cost of eggs, and a 34.8% rise in the cost of fresh fruit. And from Bloomberg News on February 16, 2011, the United Nations reported countries in Latin America and Africa, including Bolivia and Mozambique, are most at risk of food riots as prices advance; and that expensive food imports may become a “major burden” on other countries, which include Uganda, Mali, Niger and Somalia in Africa; Kyrgyzstan and Tajikistan in Asia; and Honduras, Guatemala and Haiti in Latin America. Let’s take a look at how many more dollars the international community pays just for the top three U.S. agriculture exports alone since May 2010:
Corn
The U.S. is the world’s leading shipper of corn, which trades at about $3.52 a bushel more than it did back in May. We export about 20% of a total 12.7 billion bushels produced (2.54 billion bushels), which means importers of U.S. corn are paying a total of $8.9 billion more now than then. Among the U.S.’ largest importers: Japan, Mexico, South Korea, Egypt and Taiwan;
Soybeans
The U.S. is the world’s leading shipper of soybeans. We receive $6.8 billion in excess revenue from importers on a $4.50 per-bushel price increase on 1.5 billion bushels exported. Among the largest importers: China, Japan, Mexico, Taiwan, Turkey and Egypt;
Wheat
The U.S. is the world’s leading shipper of wheat. At an additional $4 a bushel since May on 1.245 billion bushels exported, importers are paying an extra $5 billion for U.S. wheat. Among the largest importers: Egypt, Brazil, Indonesia, Algeria and Japan. (Notice that Egypt is one of the largest overall recipients of U.S. agriculture, and is also one of the worst affected – socially and politically – by food-price inflation. Japan now suffers deflationary pressure, but its economy is currently cushioned by the large public savings pool from which the Japanese government borrows at very low rates.)
Why do I start from May 2010? Following the May 6 Greece bailout, global investors poured into U.S. mortgage and Treasury bonds for most of that summer as the European debt crisis emerged. At the same time, by June, Fed purchases of mortgage-backed securities and Treasury notes – started back in late November 2008 – reached its peak of $2.1 trillion, and further purchases were halted on an improved economic outlook. But by August 2010, the Fed decided to launch QE2 on lackluster economic performance. So, since May, stock markets, commodities prices and quantitative-easing efforts have been on a tear. On top of surging commodity prices, the Dow, the S&P 500 and the NASDAQ are up roughly 22%, 23% and 27%, respectively, over this period.
Back to China, inflationary effects of Fed monetary policy on the Chinese economy prompted Chinese authorities to raise bank reserves to a record 19.5% on Friday, February 18, in an effort to reign in prices – its fifth increase since October 2010.
The following Sunday, February 20, the National Development and Reform Commission, China’s top economic planner, said gasoline, diesel and the ex-factory price of No.3 jet kerosene would be raised by 4.1%, 4.5% and 5.8% per metric ton, respectively, in order to curb growth in oil consumption and help ensure market supply, the WSJ reported.
In spite of these obvious inflationary pressures on the Chinese economy, its government continues to resist calls for yuan revaluation, sticking to its position that any decision on yuan reform is a matter of internal discussion. China seeks to sustain its export market.
With China taking every measure to slow inflation besides revaluing the yuan amid the spread of social unrest throughout Northern Africa and the Middle East, the Fed may have indicated its intention to wind down QE when it ordered the 19 largest U.S. banks to test their capital levels against a scenario of renewed recession with unemployment rising above 11 percent. The order follows a presentation by JPMorgan Chief Financial Officer Douglas Braunstein telling investors JPMorgan’s own stress scenario braces for a 4% decline in GDP through the third quarter of this year and an 11.7% unemployment rate (Bloomberg). The Fed may have concluded, upon extensive consultations, that the measures taken to create an accommodative environment for U.S. economic growth are not worth the collateral damage – social upheaval, political chaos and economic losses inflicted on the broader global economy – brought about by quantitative easing.
Perhaps we are beginning to discover that if we look not only to U.S. interest, but also to the interest of poorer nations, we find that their best interest is in our best interest.
