Food riots in India as prices soar

[phantom power]

Anger brews as soaring staple foods and inflation hit millions who can no longer afford to pay for basic commodities.
Last Modified: 28 Feb 2011 10:11 GMT

Pranab Mukherjee, India's Finance Minister has presented his annual budget, acknowledging that food inflation was still a major concern for the world's second most populous country in the world.

On Monday, Mukherjee announced a food security bill for 2011 - 2012, a measure that would provide cheap grains for millions of India's poor.

However, the announcement has sparked worries of a huge fiscal cost.

In a pilot program, the minister said some subsidies for food and fuel would be directly given as cash to customers starting in March 2011.

http://english.aljazeera.net/video/asia/2011/02/201122891532942668.html

[GliderGuider]

1. Subsidies for energy and food are inevitable in many places.

Subsidies are the one simple means governments have to short-circuit market-driven allocation and to redistribute GDP to sectors that have higher social than economic priority. We’re going to see a lot more of them in the next decade or two.

[Frustratedlady]

2. I need educating on this food shortage/price increase...

Is it really a shortage, or is it money market speculation? If it is speculation, why can't that be controlled? Control it on food and oil?

Just look at the bedlam and death this is causing. It is insane.

[phantom power]

3. I will speculate on speculation

Firstly, there is an actual trend of increasing crop losses and decreasing food reserves. It's not an economic phenomenon. Speculation, in my understanding, acts as an amplifier -- it may be making an existing situation worse. It may even be performing a "useful" function, to the extent that speculation can embody the impacts of future shortages.

[GliderGuider]

4. Food and oil markets are both futures markets, so they are inherently speculative.

Since they are futures markets they're supposed to be speculative - buyers speculate on what the supply and demand situation might be like at some point in the future, and the consensus opinion ends up setting the price for that date. There are opportunities for manipulation, but at least in the oil market they are fairly small due to the size of the market (the export market alone trades $1.5 trillion worth of oil a year, from hundreds of producers and thousands of buyers).

The actual cost of producing oil is around $40 a barrel on average, and producers want a bit of profit, so let's say the "break-even+reasonable profit" price amounts to $50 a barrel. This means that in a $100 market up to 50% of the price (the remaining $50) might be "speculation". The risk premium we're seeing today because of unrest in the Middle East (which is the most visible part of speculation since it's very volatile) accounts for maybe $15/barrel, leaving $35 between the producer's cost+profit of $50 and the price less the immediate risk premium.

So out of $100 a barrel for oil, perhaps $35 is accounted for by buyers speculating on what the supply/demand situation is going to be anywhere from a few months to a year or more out. The oil price we see quoted is usually the "front month" contract price, meaning it's for oil that will be delivered in the next month.

IMO the reason we've been seeing oil prices creep up from $40 over the last 6 or 7 years is due to a dawning realization that the supply is getting tighter. There has been no increase in the amount of oil the world has been able to extract since the beginning of 2005. The supply appears to be on a plateau. In addition the new oil that's being brought on line is higher cost oil like deep water or oil sands, that may have a break-even price of $60 a barrel. so there's a limit to the supply, and the supply that's there is gradually becoming more expensive. Oil futures traders see that situation and price in their expectation that this situation will continue into the future. Voila, "speculation" raises the price by 20% or 30%, with those extra profits flowing back to the producers (who are, after all, selling a non-renewable commodity and welcome the income).

The situation with food is somewhat similar, with the future events including crop reductions in various places due to bad weather this season (in places like Pakistan, Northern China, Australia, Thailand and the EU), as well as the dawning realization that bad weather events may be the "new normal" and that GW is going to further restrict the amount we can grow in future years. AND there's the effect of world oil prices on food prices. We use a lot of our oil in the global food system (as much as 20% or more of it), so any increase in oil prices will directly affect the price of food.

This is a long-winded way of saying yes, there is some speculation in the oil and food markets, but it’s inherent to the system and I don’t think it rises to the level of manipulation. The best way to approach it for now is probably with direct subsidies rather than trying to change the operation of the global markets. There is less chance of unintended consequences, since we understand how subsidies work.

[bhikkhu]

5. ...don't forget the "invisible hand"

It works just as you say, and just as it is supposed to work (in economic theory) with the addition that when scarcity or projected scarcity causes high prices, high prices are supposed to cause substitution. When one product is too expensive, people switch to another. Demand on the over-priced commodity decreases and the price self-corrects - the "invisible hand" at work.

Of course, if people refuse to use anything other than the over-priced commodity, then they have no one else to blame but themselves...

[GliderGuider]

6. Sometimes the reason the hand is invisible is that it doesn't exist.

Sometimes, as in the case of oil, there is no available substitute. At least not if you're a dirt-poor farmer in Pakistan or Peru. No fancy electric tractors or biodiesel for you, mate. Of course, they could refuse to use the over-priced commodity... but then they'd have no one to blame but themselves if they starved to death.

It's all too easy to sit in North America or Europe and talk about alternatives - we at least have a few. 90% of the people on the planet don't have that luxury. For them it's pay the price or do without - for both food and fuel.

[bhikkhu]

7. Or at least is very difficult, for most

In my case, when oil prices went up I parked the car and started biking to work. Its worked great for me, and it would probably be a good choice for most people (whether they think so or not), but then there are people who couldn't do it. Substitution is usually possible, but not always convenient.

Food is more difficult - I keep a big garden going, though of course its nowhere near providing for household needs. I had thoughts of greatly expanding it, but the money saved by not having vehicle expenses has made that unnecessary. And growing and storing food is certainly hard work. In spite of living far below the poverty line, I think one element of affluence is having the choice to take it easy, as we have enough without working so hard.

[GliderGuider]

8. Being poor in North America is like being middle class in many countries.

Try living below the poverty line in Sierra Leone instead of San Francisco (or anywhere else in the USA) and you'd be telling a far different story. It will be interesting to see what becomes of our blessings over the next 20 years.