While we are digging out from another big snow storm on the east coat of the US and the West is facing another wet wintry mix, South America is in the middle of a heat wave. This is cutting into the harvest forecasts, which is pushing up crop prices to two year highs. Global food prices have been somewhat elastic even with the crop shortages from Russia this summer. This latest crop reduction may test this price elasticity. The dry weather in South America is caused by the La Nina weather pattern, which has already damaged the corn crops in Argentina. Argentina is the world's second largest exporter of corn and third largest exporter of soybeans. Both Brazil and Uruguay have declared a state of emergency with rising temperatures and small amounts of precipitation. Ironically, California has been experiencing an enormous amount of rain and snow during a La Nina season; however, many forecasters believe that California will soon be experiencing a dry winter.
Currently, the prices of corn, wheat and soybeans remain well below the peak prices in 2008. However, some analysts see a rise in prices of these crops in the near future, which means an increase in food prices at the supermarket. This may have a bigger impact in emerging markets where food inflation can have a significant impact on its population became more of their disposable income goes to food than in developed countries. A way countries may address this potential inflation is limit exports of its own crops like Russia did this summer. Countries like India are offering other alternatives, such as food subsidies, where the country is already dealing with food inflation surging to 12.13% from 9.46%.
In fact, corn and soybean futures contracts have already increased this month by 18% and 9%, respectively, to their highest prices since the financial crisis undercut commodity prices in 2008. Corn is up 51% since then and soybeans are up 31%. Also, wheat prices this month have increased 23% because of the significant amount of rain in Australia, which has ruined wheat crops there.
So in the end for Americans, this means that the lovely Chilean grapes that you have in the dead of winter might be a little more expensive this year. Unfortunately, this might have a great impact to a family in Haiti or India.
Friday, December 31, 2010
Friday, December 24, 2010
Is this a lot of hot air? And it is not always sunny in Spain.
The continuous battle between China and US in the WTO continues; however, this time it involves renewable energy. The US has requested to talk to China at the World Trade Organization to end the hundred of millions of dollars of subsidies China is spending to build up its wind-power production. Most of us would say, "What is wrong if China wants to build its own wind technology and spend government money on that?" The answer is that China is not just building technology for its own wind production. It is building technology for export to other countries. The US is already falling behind to China in renewable technology. Right now, China ranks among the top ten producers globally in wind-turbine production. So what is the American government's beef here? Actually, it is not just our government complaining. It is also the United Steelworkers complaining too.
The Chinese government is providing wind-power manufacturing grants to this Chinese producers using parts made domestically, which such grants ranges from $6.7 million to $22.5 million. This is a form of import subsidization that creates less incentive for Chinese wind turbine producers to use imported parts, such as US parts, because they will less likely get a grant from the Chinese government to operate their business. Thus, it creates an indirect barrier for US imported parts to get into the Chinese market.
Ironically, one way to mitigate this would be for the US government help develop its own wind-energy program and wind producing technology. Unfortunately, with a push for austerity in government, that is most likely not going to happen.
Solar Side Note: Spain is in the middle of a debt crisis and the Spanish government is looking to cut certain subsidized programs. It looks like Spain's solar energy program is one of the victims of the Spanish debt cutting. The Spanish government is expected to adopt a proposal within the next few days to cut solar-PV subsidies by as much as 30%. There is, however, some push back here. Many investors, including a foreign hedge fund investors in the UK, are pushing back arguing that this was never communicated to them when the invested in the first place. They view this as a "breach of trust." Ironically, some of this view that this action will cause solar producers to default on their loans with the banks without these subsidies. Which is worse, a business defaulting on it loans or the Spanish government? I believe most people in the EU, the US and IMF would say that the Spanish government defaulting would be worse as we saw the chaos created in Ireland and Greece as both countries were on the precipice of such default.
The Chinese government is providing wind-power manufacturing grants to this Chinese producers using parts made domestically, which such grants ranges from $6.7 million to $22.5 million. This is a form of import subsidization that creates less incentive for Chinese wind turbine producers to use imported parts, such as US parts, because they will less likely get a grant from the Chinese government to operate their business. Thus, it creates an indirect barrier for US imported parts to get into the Chinese market.
Ironically, one way to mitigate this would be for the US government help develop its own wind-energy program and wind producing technology. Unfortunately, with a push for austerity in government, that is most likely not going to happen.
Solar Side Note: Spain is in the middle of a debt crisis and the Spanish government is looking to cut certain subsidized programs. It looks like Spain's solar energy program is one of the victims of the Spanish debt cutting. The Spanish government is expected to adopt a proposal within the next few days to cut solar-PV subsidies by as much as 30%. There is, however, some push back here. Many investors, including a foreign hedge fund investors in the UK, are pushing back arguing that this was never communicated to them when the invested in the first place. They view this as a "breach of trust." Ironically, some of this view that this action will cause solar producers to default on their loans with the banks without these subsidies. Which is worse, a business defaulting on it loans or the Spanish government? I believe most people in the EU, the US and IMF would say that the Spanish government defaulting would be worse as we saw the chaos created in Ireland and Greece as both countries were on the precipice of such default.
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