Why are food prices rising around the world?

Food prices have been rising around the world. What is behind this trend? Food has now become a commodity for price manipulation and criminal speculation. These articles help to explain the fraud, market manipulation, and forces behind this destabilizing phenomena.

THE EGYPTIAN TINDERBOX: HOW BANKS AND INVESTORS ARE STARVING THE THIRD WORLD

Ellen Brown

February 2nd, 2011

“What for a poor man is a crust, for a rich man is a securitized asset class.”

–Futures trader Ann Berg, quoted in the UK Guardian

Underlying the sudden, volatile uprising in Egypt and Tunisia is a growing global crisis sparked by soaring food prices and unemployment. The Associated Press reports that roughly 40 percent of Egyptians struggle along at the World Bank-set poverty level of under $2 per day. Analysts estimate that food price inflation in Egypt is currently at an unsustainable 17 percent yearly. In poorer countries, as much as 60 to 80 percent of people’s incomes go for food, compared to just 10 to 20 percent in industrial countries. An increase of a dollar or so in the cost of a gallon of milk or a loaf of bread for Americans can mean starvation for people in Egypt and other poor countries.

Follow the Money

The cause of the recent jump in global food prices remains a matter of debate. Some analysts blame the Federal Reserve’s “quantitative easing” program (increasing the money supply with credit created with accounting entries), which they warn is sparking hyperinflation. Too much money chasing too few goods is the classic explanation for rising prices.

The problem with that theory is that the global money supply has actually shrunk since 2006, when food prices began their dramatic rise. Virtually all money today is created on the books of banks as “credit” or “debt,” and overall lending has shrunk. This has occurred in an accelerating process of deleveraging (paying down or writing off loans and not making new ones), as the subprime housing market has collapsed and bank capital requirements have been raised. Although it seems counterintuitive, the more debt there is, the more money there is in the system. As debt shrinks, the money supply shrinks in tandem.

That is why government debt today is not actually the bugaboo it is being made out to be by the deficit terrorists. The flipside of debt is credit, and businesses run on it. When credit collapses, trade collapses. When private debt shrinks, public debt must therefore step in to replace it. The “good” credit or debt is the kind used for building infrastructure and other productive capacity, increasing the Gross Domestic Product and wages; and this is the kind governments are in a position to employ. The parasitic forms of credit or debt are the gamblers’ money-making-money schemes, which add nothing to GDP.

Prices have been driven up by too much money chasing too few goods, but the money is chasing only certain selected goods. Food and fuel prices are up, but housing prices are down. The net result is that overall price inflation remains low.

While quantitative easing may not be the culprit, Fed action has driven the rush into commodities. In response to the banking crisis of 2008, the Federal Reserve dropped the Fed funds rate (the rate at which banks borrow from each other) nearly to zero. This has allowed banks and their customers to borrow in the U.S. at very low rates and invest abroad for higher returns, creating a dollar “carry trade.”

Meanwhile, interest rates on federal securities were also driven to very low levels, leaving investors without that safe, stable option for funding their retirements. “Hot money” – investment seeking higher returns – fled from the collapsed housing market into anything but the dollar, which generally meant fleeing into commodities.

New Meaning to the Old Adage “Don’t Play with Your Food”

At one time food was considered a poor speculative investment, because it was too perishable to be stored until market conditions were right for resale. But that changed with the development of ETFs (exchange-traded funds) and other financial innovations.

As first devised, speculation in food futures was fairly innocuous, since when the contract expired, somebody actually had to buy the product at the “spot” or cash price. This forced the fanciful futures price and the more realistic spot price into alignment. But that changed in 1991. In a revealing July 2010 report in Harper’s Magazine titled “The Food Bubble: How Wall Street Starved Millions and Got Away with It,” Frederick Kaufman wrote:

The history of food took an ominous turn in 1991, at a time when no one was paying much attention. That was the year Goldman Sachs decided our daily bread might make an excellent investment. . . .

Robber barons, gold bugs, and financiers of every stripe had long dreamed of controlling all of something everybody needed or desired, then holding back the supply as demand drove up prices.

As Kaufman explained this financial innovation in a July 16 interview on Democracy Now:

Goldman . . . came up with this idea of the commodity index fund, which really was a way for them to accumulate huge piles of cash for themselves. . . . Instead of a buy-and-sell order, like everybody does in these markets, they just started buying. It’s called “going long.” They started going long on wheat futures. . . . And every time one of these contracts came due, they would do something called “rolling it over” into the next contract. . . . And they kept on buying and buying and buying and buying and accumulating this historically unprecedented pile of long-only wheat futures. And this accumulation created a very odd phenomenon in the market. It’s called a “demand shock.” Usually prices go up because supply is low . . . . In this case, Goldman and the other banks had introduced this completely unnatural and artificial demand to buy wheat, and that then set the price up. . . . [H]ard red wheat generally trades between $3 and $6 per sixty-pound bushel. It went up to $12, then $15, then $18. Then it broke $20. And on February 25th, 2008, hard red spring futures settled at $25 per bushel. . . . [T]he irony here is that in 2008, it was the greatest wheat-producing year in world history.

. . . [T]he other outrage . . . is that at the time that Goldman and these other banks are completely messing up the structure of this market, they’ve protected themselves outside the market, through this really almost diabolical idea called “replication” . . . . Let’s say, . . . you want me to invest for you in the wheat market. You give me a hundred bucks . . . . [W]hat I should be doing is putting a hundred bucks in the wheat markets. But I don’t have to do that. All I have to do is put $5 in. . . . And with that $5, I can hold your hundred-dollar position. Well, now I’ve got ninety-five of your dollars. . . . [W]hat Goldman did with hundreds of billions of dollars, and what all these banks did with hundreds of billions of dollars, is they put them in the most conservative investments conceivable. They put it in T-bills. . . . [N]ow that you have hundreds of billions of dollars in T-bills, you can leverage that into trillions of dollars. . . . And then they take that trillion dollars, they give it to their day traders, and they say, “Go at it, guys. Do whatever is most lucrative today.” And so, as billions of people starve, they use that money to make billions of dollars for themselves.

Other researchers have concurred in this explanation of the food crisis. In a July 2010 article called “How Goldman Sachs Gambled on Starving the World’s Poor – And Won,” journalist Johann Hari observed:

Beginning in late 2006, world food prices began rising. A year later, wheat price had gone up 80 percent, maize by 90 percent and rice by 320 percent. Food riots broke out in more than 30 countries, and 200 million people faced malnutrition and starvation. Suddenly, in the spring of 2008, food prices fell to previous levels, as if by magic. Jean Ziegler, the UN Special Rapporteur on the Right to Food, has called this “a silent mass murder”, entirely due to “man-made actions.”

Some economists said the hikes were caused by increased demand by Chinese and Indian middle class population booms and the growing use of corn for ethanol. But according to Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi, demand from those countries actually fell by 3 percent over the period; and the International Grain Council stated that global production of wheat had increased during the price spike.

According to a study by the now-defunct Lehman Brothers, index fund speculation jumped from $13 billion to $260 billion from 2003 to 2008. Not surprisingly, food prices rose in tandem, beginning in 2003. Hedge fund manager Michael Masters estimated that on the regulated exchanges in the U.S., 64 percent of all wheat contracts were held by speculators with no interest whatever in real wheat. They owned it solely in anticipation of price inflation and resale. George Soros said it was “just like secretly hoarding food during a hunger crisis in order to make profits from increasing prices.”

An August 2009 paper by Jayati Ghosh, professor at the Centre for Economic Studies and Planning at Jawaharlal Nehru University in New Dehli, compared food staples traded on futures markets with staples that were not. She found that the price of food staples not traded on futures markets, such as millet, cassava and potatoes, rose only a fraction as much as staples subject to speculation, such as wheat.

Nomi Prins, writing in Mother Jones in 2008, also blamed the price hikes on speculation. She observed that agricultural futures and energy futures were being packaged and sold just like CDOs (collateralized debt obligations), but in this case they were called CCOs (collateralized commodity obligations). The higher the price of food, the more CCO investors profited. She warned:

[W]ithout strong regulation of electronic exchanges and the derivatives products that enable speculators to move huge proportions of the futures markets underlying commodities, putting a bit of regulation into the London-based exchanges will not alleviate anything. Unless that’s addressed, this bubble is going to take more than homes with it. It’s going to take lives.

What Can Be Done?

According to Kaufman, the food bubble has now increased the ranks of the world’s hungry by 250 million. On July 21, 2010, President Obama signed a Wall Street reform bill that would close many of the regulatory loopholes allowing big financial institutions to play in agriculture commodity futures markets, but Kaufman says the bill’s solutions are not likely to work. Wall Street innovators can devise new ways to speculate that easily dance around cumbersome, slow-to-pass legislation. Attempts to ban all food speculation are also unlikely to work, he says, since firms can pick up the phone and do their trades through London, or arrange over-the-counter (private) swaps.

As an alternative, Kaufman suggests a worldwide or national grain reserve, so that regulators can bring wheat into the market when needed to stabilize prices. He notes that we actually kept a large grain reserve in the Clinton era, before the mania for deregulation. President Franklin Roosevelt pledged to maintain a large grain reserve in his second Agricultural Adjustment Act in 1938.

Chris Cook, former director of a global energy exchange, maintains:

The only long term solution is to completely re-architect markets. Firstly, cutting out middlemen — which is a process already under way. Secondly, a new settlement between producer and consumer nations — a Bretton Woods II.

Speculative markets today are driven more by fear, says Cook, than by greed. Investors are looking for something safe that will give them an adequate return, which means something they can live on in retirement. They need these investments because their employers and the government do not provide an adequate safety net.

At one time, federal securities were a safe and adequate investment for retirees. Then federal interest rates plunged, and investors moved into municipal bonds. Now that market too is collapsing, due to threats of bankruptcy among bond issuers. Cities, counties and states floundering from the credit crisis have been denied access to the quantitative easing tools used to bail out the banks — although it was the banks, not local governments, that caused the crisis. See “The Fed Has Spoken: No Bailout for Main Street.”

Meanwhile, pensions are being slashed and social security is under attack. Arguably, along with the grain reserves institutionalized under Franklin Roosevelt, we need an Economic Bill of Rights of the sort he envisioned, one that would guarantee citizens at least a bare minimum standard of living. This could be done through job guarantees when people were able to work and social security when they were not. The program could be funded with government-created credit or government-bank-created credit, and this could be done without causing hyperinflation. To support that contention would take more space than is left here, but the subject has been tackled in my book Web of Debt. In the meantime, the credit needed to get local economies up and running again can be furnished through publicly-owned banks. For more on that possibility, see http://PublicBankingInstitute.org.

Source: http://www.webofdebt.com/articles/egyptian_tinderbox.php

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The 25 Countries Whose Governments Could Get Crushed By Food Price Inflation

Food inflation is now a reality for much of the world. It contributed to the overthrow of the Tunisian government, has led to riots across the Middle East and North Africa, driven up costs in China and India, and may only be getting started. Whether you blame a bad crop or bad monetary policy, food inflation is here. Nomura produced a research report detailing the countries that would be crushed in a food crisis. One, Tunisia, has already seen its government overthrown. Their description of a food crisis is a prolonged price spike. They calculate the states that have the most to lose by a formula including:

• Nominal GDP per capita in USD at market exchange rates.
• The share of food in total household consumption.
• Net food exports as a percentage of GDP.

We’ve got the top 25 countries in danger here and the list, including a major financial center, may surprise you.

#1 Bangladesh

• GDP per capita in USD: $497
• Food as a percentage of total household consumption: 53.8%
• Net food exports (as percentage of GDP): -3.3%

#2 Morocco

• GDP per capita in USD: $2,769
• Food as a percentage of total household consumption: 63.0%
• Net food exports (as percentage of GDP): -2.1%

#3 Algeria

• GDP per capita in USD: $4,845
• Food as a percentage of total household consumption: 53.0%
• Net food exports (as percentage of GDP): -2.8%

#4 Nigeria

• GDP per capita in USD: $1,370
• Food as a percentage of total household consumption: 73.0%
• Net food exports (as percentage of GDP): -0.9%

#5 Lebanon

• GDP per capita in USD: $6,978
• Food as a percentage of total household consumption: 34.0%
• Net food exports (as percentage of GDP): -3.9%

#6 Egypt

• GDP per capita in USD: $1,991
• Food as a percentage of total household consumption: 48.1%
• Net food exports (as percentage of GDP): -2.1%

#7 Sri Lanka

• GDP per capita in USD: $2,013
• Food as a percentage of total household consumption: 39.6%
• Net food exports (as percentage of GDP): -2.7%

#8 Sudan

• GDP per capita in USD: $1,353
• Food as a percentage of total household consumption: 52.9%
• Net food exports (as percentage of GDP): -1.3%

#9 Hong Kong

• GDP per capita in USD: $30,863
• Food as a percentage of total household consumption: 25.8%
• Net food exports (as percentage of GDP): -4.4%

#10 Azerbaijan

• GDP per capita in USD: $5,315
• Food as a percentage of total household consumption: 60.2%
• Net food exports (as percentage of GDP): -0.6%

#11 Angola

• GDP per capita in USD: $4,714
• Food as a percentage of total household consumption: 46.1%
• Net food exports (as percentage of GDP): -1.4%

#12 Romania

• GDP per capita in USD: $9,300
• Food as a percentage of total household consumption: 49.4%
• Net food exports (as percentage of GDP): -1.1%

#13 Philippines

• GDP per capita in USD: $1,847
• Food as a percentage of total household consumption: 45.6%
• Net food exports (as percentage of GDP): -1.0%

#14 Kenya

• GDP per capita in USD: $783
• Food as a percentage of total household consumption: 45.8%
• Net food exports (as percentage of GDP): -0.8%

#15 Pakistan

• GDP per capita in USD: $991
• Food as a percentage of total household consumption: 47.6%
• Net food exports (as percentage of GDP): -0.4%

#16 Libya

• GDP per capita in USD: $14,802
• Food as a percentage of total household consumption: 37.2%
• Net food exports (as percentage of GDP): -1.7%

#17 Dominican Republic

• GDP per capita in USD: $4,576
• Food as a percentage of total household consumption: 38.3%
• Net food exports (as percentage of GDP): -1.1%

#18 Tunisia

• GDP per capita in USD: $3,903
• Food as a percentage of total household consumption: 36.0%
• Net food exports (as percentage of GDP): -1.1%

#19 Bulgaria

• GDP per capita in USD: $6,546
• Food as a percentage of total household consumption: 49.5%
• Net food exports (as percentage of GDP): -0.1%

#20 Ukraine

• GDP per capita in USD: $3,899
• Food as a percentage of total household consumption: 61.0%
• Net food exports (as percentage of GDP): 0.9%

#21 India

• GDP per capita in USD: $1,017
• Food as a percentage of total household consumption: 49.5%
• Net food exports (as percentage of GDP): 0.3%

#23 Latvia

• GDP per capita in USD: $14,908
• Food as a percentage of total household consumption: 34.3%
• Net food exports (as percentage of GDP): -1.1%

#24 Vietnam

• GDP per capita in USD: $1,051
• Food as a percentage of total household consumption: 50.7%
• Net food exports (as percentage of GDP): 0.8%

#25 Venezuela

• GDP per capita in USD: $11,246
• Food as a percentage of total household consumption: 32.6%
• Net food exports (as percentage of GDP): -1.0%

Source: http://www.businessinsider.com/governments-food-price-inflation-2011-1?slop=1

Global Food Prices 2003-2011

US Food and Gas Expenditures as % of Income

FOA Food Price Index

FOA Food Price Index

How Farm Subsidies Harm Taxpayers, Consumers, and Farmers, Too

by Brian M. Riedl

Click here for a chart showing Top 10 Urban ‘Farmers’

This year’s expiration of federal agriculture policies gives Congress an important opportunity to take a fresh look at the $25 billion spent annually on farm subsidies. Current farm policies are so poorly designed that they actually worsen the conditions they claim to solve. For example:

• Farm subsidies are intended to alleviate farmer poverty, but the majority of subsidies go to com­mercial farms with average incomes of $200,000 and net worths of nearly $2 million.
• Farm subsidies are intended to raise farmer incomes by remedying low crop prices. Instead, they promote overproduction and therefore lower prices further.
• Farm subsidies are intended to help struggling family farmers. Instead, they harm them by exclud­ing them from most subsidies, financing the con­solidation of family farms, and raising land values to levels that prevent young people from entering farming.
• Farm subsidies are intended to be consumer-friendly and taxpayer-friendly. Instead, they cost Americans billions each year in higher taxes and higher food costs.

Lawmakers would be hard-pressed to enact a set of policies that are more destructive to farmers, taxpay­ers, and consumers than the current farm policies. For these and other reasons, organizations represent­ing taxpayers, consumers, environmentalists, inter­national trade, Third World countries, and even farmers themselves have united around the shared conclusion that the current farm subsidy system is failing and in dire need of reform during this year’s reauthorization.

A Solution Seeking a Problem

Before delving into the minutiae of farm policy, lawmakers should first determine what subsidies are intended to accomplish. When President Frank­lin D. Roosevelt introduced farm subsidies in the 1930s, Secretary of Agriculture Henry Wallace called them “a temporary solution to deal with an emergency.”[1] That emergency was the collapsing farm incomes that afflicted the 25 percent of the population living on farms.

Today, farmers account for just 1 percent of the population, and farm household incomes are well above the national average, making the orig­inal justification irrelevant. What modern market failure or social problem is solved by farm pro­grams today? Subsidy advocates offer five flawed justifications.

Myth #1: Farmer poverty.

This is the most common-and provably incor­rect-justification. The average farm household earns $81,420 annually (29 percent above the national average); has a net worth of $838,875 (more than eight times the national average); and is located in a rural area with a low cost of living.[2] The farm industry’s current 11.4 percent debt-to-asset ratio is the lowest ever measured and helps to explain why farms fail at only one-sixth the rate of non-farm businesses.[3]

Overall, net farm income totaled $279 billion between 2003 and 2006-the highest four-year total ever.[4] The farm economy is thriving, and farmer incomes are soaring.

Furthermore, farm subsidy formulas are designed to benefit large agribusinesses rather than family farmers. Most farm subsidies are distributed to commercial farmers, who have an average income of $199,975 and an average net worth of just under $2 million.[5] If farm subsidies were really about alleviating farmer poverty, lawmakers could guarantee every full-time farmer an income of 185 percent of the federal level ($38,203 for a family of four) for just over $4 billion annually-one-sixth of the current cost of farm subsidies.[6]

Myth #2: Crop disaster compensation.

While farming can be very profitable, farmers are always one weather disaster away from losing their crops, but this risk can be handled with basic crop insurance rather than with expensive annual gov­ernment subsidies. Washington does not address homeowners’ risks by writing each family an annual check regardless of whether or not their homes have been damaged.

Giving farmers $25 billion in annual subsidies regardless of whether or not their crops have been damaged is no more logical. Crop insurance mar­kets, as well as futures and options markets, can bal­ance good and bad years in a way that is cost-neutral over the long run.

Myth #3: Maintaining a cheap and stable food supply.

Some contend that food markets would fluctu­ate wildly without farm subsidies. In reality, food prices of both subsidized and unsubsidized crops are relatively stable. Given that the percentage of family budgets spent on food has dropped from 25 percent to 10 percent since 1933, any potential price instability would have an increasingly small impact on family budgets.[7] Even if price stabiliza­tion was necessary, price support programs have largely been replaced by commodity subsidies that stimulate overproduction rather than stabi­lize prices.

Nor do farm subsidies contribute to lower food costs. Two-thirds of food production is unsubsi­dized and thus relatively unaffected by subsidies. Of the remaining one-third, price reductions caused by crop subsidies are balanced by conservation pro­grams that raise prices. Furthermore, food prices are based not only on crop prices, but also on food processing, transportation, and marketing costs. Bruce Babcock, professor of economics at Iowa State University, has calculated that eliminating farm subsidies would have virtually no effect on food prices.[8]

Myth #4: National security.

Proponents contend that without subsidies, American farm products would be replaced by imports, leaving the United States dangerously dependent on foreigners for food. However, the United States currently grows more food than it needs to feed itself and exports a quarter of its pro­duction.[9] The lack of subsidies has not driven all beef, poultry, pork, fruit, and vegetable production out of America, nor would it drive away production of currently subsidized crops.

Myth #5: Other countries’ agricultural policies.

Europe and Japan’s farm subsidies bring Ameri­can consumers food at below-market prices. Rather than enact trade barriers to prevent this, Americans should welcome the cheap imports and allow farm­ers to focus on producing the crops in which the United States has a comparative advantage. Responding with U.S. subsidies and trade barriers has the net effect of raising prices for American con­sumers and thereby limiting any progress in free-trade negotiations. Australia largely eliminated its farm subsidies in the 1970s, and after a brief adjust­ment, its farm economy flourished. New Zealand implemented a similar policy in the 1980s with the same result.[10]

Two-thirds of all farm production-including fruit, vegetables, beef, and poultry-thrives despite being ineligible for farm subsidies.[11] If any of the five justifications were valid, these farmers would be impoverished, near bankruptcy, or replaced by imports, and both the supplies and prices of fruit, vegetables, beef, and poultry would fluctuate wildly. Clearly, this has not happened. In this controlled experiment comparing subsidized and unsubsi­dized crops, the doomsday scenarios described above have not occurred for unsubsidized crops.

The most logical explanation for the persistence of farm subsidies is simple politics. Eliminating a government program is nearly impossible because recipients form interest groups that relentlessly defend their handouts. The public paying the costs is too busy going about their lives to challenge each wasteful program. Furthermore, supporters of farm subsidies often repeat the five justifications, espe­cially the myth that these policies aid struggling family farmers. The difference between perception and reality in farm policy is large.

How Farm Subsidies Lack Economic Sense

Farm subsidies serve no legitimate public pur­pose. Worse, they harm the farm economy. This section explains both how farm subsidies work and the economic incoherence embedded in U.S. farm policy. (See also the accompanying text box, “How Farm Subsidies Are Calculated.”)

The Main Commodity Programs. Farm policy is extraordinarily complex. This complexity conve­niently insulates the farm policymaking process within a small group of lawmakers and interest groups who specialize in the details.

Subsidy eligibility is based on the crop. More than 90 percent of all subsidies go to just five crops-wheat, cotton, corn, soybeans, and rice- while the vast majority of crops are ineligible for subsidies. Once eligibility is established, subsidies are paid per amount of the crop produced, so the largest farms automatically receive the largest checks.

Subsidies are also quite duplicative. The names of the three different commodity subsidies do not adequately describe their purposes:

• Marketing loan program. Despite being called a “loan,” this program has the net effect of reim­bursing farmers for the difference between a crop’s market price and the minimum level that Congress sets every five to six years.[12]
• Fixed payments. Fixed payments are given to farmers based on their farms’ historical produc­tion and are unrelated to actual production.
• Countercyclical payments. This program func­tions somewhat similarly to the marketing loan program by subsidizing farmers up to a govern­ment-set target price. This rate is higher than the marketing loan rate and therefore represents an additional subsidy.

For farmers who grow the subsidized crop, these policies have the net effect of subsidizing them up from their crop’s market price to its countercyclical price rate, or even higher when the market price is above the countercyclical rate and they receive fixed payments.

Remedying Low Prices with Lower Prices. Farm policy is supposed to help farmers recover income lost because of low crop prices. However, farmers can increase their subsidies by planting additional acres, which increases production and drives prices down further, thereby spurring demands for even greater subsidies. In other words, subsidies merely lower prices. This is the policy equivalent of trying to use gasoline to extin­guish a fire.

When the 1996 farm bill increased the market­ing loan rate of soybeans from $4.92 to $5.26 per bushel (which meant larger subsidies), farmers responded by planting an additional 8 million acres of soybeans, which contributed to the 33 percent decline in soybean prices over the next two years.[13] Instead of alleviating low soybean prices, the new subsidies accelerated their fall at considerable tax­payer expense. Even the U.S. Department of Agri­culture (USDA) admits that subsidy increases have induced farmers to plant millions of new acres of wheat, soybeans, cotton, and corn.[14]

In a free market, low prices serve as an important signal that supply has exceeded consumer demand and that production should shift accordingly. By shielding farmers from low market prices, farm sub­sidies induce farmers to grow whatever government will subsidize, not what consumers really want. Stephen Houston Jr., a Georgia cotton farmer, recently told The Atlanta Journal-Constitution, “We’re just playing a game. [Market] prices don’t have anything to do with what we’re doing. We’re just looking at the government payments.”[15]

Contradictory Policies. After handing out com­modity subsidies that pay farmers to plant more crops, Washington then turns around and pays other farmers not to farm 40 million acres of crop­land each year-the equivalent of idling every farm in Wisconsin, Michigan, Indiana, and Ohio. The Conservation Reserve Program, which pays farmers to sign 10-year contracts pledging not to farm their land, is often promoted as supporting environmen­tal stewardship. In reality, removing farmland to raise crop prices has been the program’s central long-term justification. Paying some farmers to plant more crops and others to plant fewer crops simply makes no sense.

Ignoring Yields. The illogic does not end there. Businesses calculate their revenues by multiplying the product’s price by the quantity sold. Similarly, farmers calculate per-acre revenues by multiplying the crop price by the yield (crop volume per acre). However, farm subsidy formulas focus only on crop prices and simply plug in a historical yield measure for the quantity.

This makes little sense. Revenues depend as much on the quantity sold as on the price, and these two variables often move in opposite direc­tions. In agriculture, this leads to one of two com­mon scenarios:

• Surging yields flood the market with crops and cause prices to drop. Total revenues may increase, yet farmers still receive large subsidies simply because the price fell.
• Falling yields lead to crop shortages, pushing up prices. Total revenues may decline sharply, but farmers do not receive subsidies because Wash­ington focuses only on the price increase and assumes that farmers are thriving.

These scenarios are not merely theoretical. The American Farmland Trust has observed that a large drought in 2002 cut many Midwest corn farmers’ yields in half, but many farmers did not receive sub­sidies because prices did not fall. The opposite situ­ation occurred in 2005 when very large corn yields flooded the market, driving down corn prices and inducing large corn subsidies despite healthy farm revenues.[16] Consequently, Washington often wastes taxpayer dollars by subsidizing farmers when they need it the least.

Subsidizing Both Crop Insurance and Disaster Aid. In 2000, Washington tripled crop insurance subsidies in an effort to eliminate the need for farm disaster payments. The budget-busting 2002 farm bill was also promoted as being large enough to reduce the need for disaster payments.

Yet even with generous farm programs and sub­sidized crop insurance, Congress has passed a disas­ter aid bill every year since 2000 at a total cost of $40 billion.[17] Congress has even drafted legislation offering disaster aid to farmers who refuse to pur­chase crop insurance at taxpayer-financed dis­counts. With Congress continuing to pass large disaster aid packages, what crop insurance subsi­dies are really funding is unclear.

The federal crop insurance program currently subsidizes 60 percent of all premiums for the 242 million acres that farmers have enrolled in the pro­gram. It is run by 16 private firms that accept fed­eral subsidies but must charge the prices set by Washington. Recently, an insurer that dared to offer farmers a discount was upbraided at a congressional hearing, and Representative Jack Kingston (R-GA) successfully authored legislation to prohibit federal subsidies for that plan.[18]

The program seems to have been designed to aid insurance companies and harm taxpayers. Insurers are allowed to pass high-risk policies on to the gov­ernment while keeping for themselves the low-risk policies that are likely to be profitable. Conse­quently, since 1998, the participating companies have earned $3.1 billion in profits, while Washing­ton has lost $1.5 billion. Additionally, since 1998, Washington has paid nearly $20 billion in premium subsidies and more than $6 billion to cover the insurance companies’ administrative costs.

All in all, the crop insurance program spends $3.34 for every $1 in paid claims-and it still has not prevented $40 billion in disaster aid.[19]

Driving Small Farmers out of Business. Farm subsidies are promoted as assistance to family farm­ers. In reality, they finance the demise of family farms and prevent young people from entering farming. Economists estimate that subsidies inflate the value of farmland by 30 percent. High farmland prices make starting a farm prohibitively expensive for younger people, who would also have other expenses, including buying expensive equipment, seeds, and pesticides. With young farmers unable to enter the industry, the average age of farmers has increased to 55.[20]

Because agribusinesses are already the most profitable, they often use their enormous farm sub­sidies to buy out smaller family farms. In what has been called the “plantation effect,” family farms with less than 100 acres are being bought out by larger agribusinesses, which then convert them into tenant farms. Three-quarters of rice farms have already become tenant farms, and other types of farms are trending in that same direction.[21] Since 1945, the number of farms has dropped by two-thirds, and the average farm size has more than doubled to 441 acres.[22]

This consolidation is not necessarily harmful and may improve efficiency. Large agribusinesses are not villainous. They often succeed because they can produce large quantities of food at low prices. Fur­thermore, the blame for the tilted distribution of farm subsidies lies with Congress, which writes the laws, rather than with the agribusinesses that cash the checks that they receive because of those laws.

Nevertheless, taxpayers should not be required to finance this consolidation through farm subsi­dies. By raising land values and financing consolida­tion, farm subsidies drive out existing small farmers and prevent new farmers from entering the industry.

The Scandalous Distribution of Farm Subsidies

One can imagine the result if Washington tried to solve poverty by creating a welfare program that applied only to workers in the fast food, cleaning, and retail industries. Everyone in those occupations would receive a government check, with the richest executives receiving the largest checks and the poorest workers receiving the smallest. Workers in other industries would receive nothing, no matter how poor they were.

Obviously, such a policy would be nonsense, yet this exemplifies how farm subsidies are distributed. The government’s solution to alleged farmer poverty is to subsidize growers of wheat, cotton, corn, soy­beans, and rice while giving no subsidies to produc­ers of fruit, vegetables, beef, poultry, and livestock. Because subsidies are paid per acre, the largest and most profitable farms receive the largest subsidies, while family farms receive next to nothing.

Thus, a large, profitable rice corporation can receive millions while a family vegetable farmer receives nothing. Overall, farm subsidies are distrib­uted with little regard to merit or need.

Corporate Welfare. Farm subsidies are pro­moted as helping struggling farmers, but Washing­ton could guarantee every full-time farmer an income of nearly $40,000 for just $4 billion annu­ally. Instead, farm policy is designed to aid corpo­rate agribusinesses. Among farmers eligible for subsidies, just 10 percent of recipients collect 73 percent of the subsidies-an average of $91,000 per farm. (See Chart 3.) By contrast, the average subsidy granted to the bottom 80 percent of recipients is less than $3,000 annually.[23]

According to the USDA, the majority of farm subsidies are distributed to commercial farms, which have an average household income of $199,975 and a net worth of just under $2 mil­lion.[24] Commercial farms are also among those that need subsidies the least because they are the most efficient. Former U.S. Farm Bureau President Dean Kleckner writes that the top quarter of corn farmers (usually agribusinesses with economies of scale) can produce a bushel of corn 68 percent cheaper than the bottom quarter of farms can.[25]

Multiplying this larger profit margin by their substantially larger production volume shows how large agribusinesses can be enormously profitable. Yet these agribusinesses, not small family farms, receive most of the subsidies, making farm subsi­dies America’s largest corporate welfare program. (See Table 1.)

That is not all. Farm subsidies over the past decade have also been distributed to:

• Fortune 500 companies, such as John Hancock Life Insurance ($2,849,799); International Paper ($1,183,893); Westvaco ($534,210); and ChevronTexaco ($446,914).
• Celebrity “hobby farmers” such as David Rock­efeller ($553,782); Ted Turner ($206,948); and Scottie Pippen ($210,520).
• Members of Congress, who vote on farm subsidies, such as Senator Charles Grassley (R- IA, $225,041); Senator Gordon Smith (R-OR, $45,400, plus a 25 percent ownership in three firms that received $2,114,622); and Represen­tative John Salazar (D-CO, $161,084).[26]
  

Payment limits do exist on paper. Subsidies are restricted to farmers with incomes below $2.5 mil­lion, and an individual’s subsidy may not exceed $180,000 per farm or $360,000 for up to three farms. However, an entire industry of lawyers exploits loop­holes, rendering these limits meaningless.

Farmers can simply divide their farms into numerous separate entities and then collect subsi­dies for each farm. For example, Tyler Farms in Arkansas has collected $37 million in farm subsi­dies since 1996 by dividing itself into 66 legally separate corporations to maximize its farm subsidies.[27] Other farmers evade payment limits by sign­ing up family members, such as the Georgia farmer who reportedly col­lected thousands in additional subsi­dies by signing up his two-year-old daughter as an additional farmer, making her eligible for up to $180,000. As Chuck Hassebrook of the Center for Rural Affairs has con­cluded, “We have no [payment] limits today.”[28]

Eligibility Restricted to a Few Crops. Only one-third of the $240 billion in annual farm production is eligible for farm subsidies. Five crops-wheat, cotton, corn, soy­beans, and rice-receive more than 90 percent of all farm subsidies. Fruits, vegetables, livestock, and poultry, which comprise two-thirds of all farm pro­duction, are generally not subsidized at all.[29] This is important for two reasons.

First, those who assert that the absence of farm subsidies would cause massive poverty, rapid price fluctuations, and the eventual demise of the agricul­tural industry have not persuasively explained why the two-thirds of the industry that operates without subsidies has experienced none of these problems.

Second, those who assert that farm subsidies are necessary to alleviate farmer poverty have not explained why Washington should favor one crop over another.

Farm Subsidies for Suburban Backyards. In 1996, lawmakers noticed that farm subsidies were only encouraging more planting and thereby fur­ther lowering prices, so they created a fixed pay­ments subsidy that would pay farmers based on what had been grown on the land historically with­out obligating them to continue planting that crop. While designed with positive intentions to reduce market distortions, these fixed payments have ended up subsidizing land that is no longer used for farming. In fact, some homeowners are now collect­ing subsidies for the grass in their backyards.

A recent Washington Post investigation discovered 75 acres of Texas farmland that had been converted into a housing development. Today, the homeown­ers on these properties (which are worth well over $300,000 each) are eligible for fixed payments for the lawn in their backyards because of its “historical rice production.” Residents never asked for these subsidies and have even stated that as non-farmers they do not want the government mailing them checks.[30] Over the past 25 years, rice plantings in Texas have plummeted from 600,000 acres to 200,000, in part because people can now collect generous rice subsidies without planting rice. If Washington insists on subsidizing farming, subsi­dizing actual farmland rather than residential neigh­borhoods that were once farmland would make more sense.

Compensation Not Based on Actual Sale Prices. As explained in the text box, the marketing loan program (despite the “loan” misnomer) effec­tively pays farmers whenever crop prices fall below a government-set minimum. Amazingly, farmers are not compensated for the actual price at which they sell their crops. Instead, they can pick the market price on any day of the year and, even if they do not sell their crops at that market price, receive a sub­sidy based on it.

For example, in 2005, the marketing loan rate for corn in DeKalb County, Illinois, was $1.98 per bushel. In September, the market price fell to $1.52 per bushel, and local farmers walked into the local USDA field office and received a payment of $0.46 per bushel. The following January, when they finally sold their corn, the price had risen to $2.60 per bushel, well above the government-set minimum. The federal policy allowed farmers to keep the sub­sidies as compensation for a low market price at which they never actually sold their crops. The amounts can be substantial: DeKalb County farmer Roger Richardson received an extra $75,000 sub­sidy for crops that grossed $500,000.[31]

These are not isolated incidents. In 2006, national corn prices were only $0.05 below the $1.95 marketing loan rate. Nonetheless, corn farm­ers received an average marketing loan subsidy of $0.44 per bushel.[32] President Bush has proposed addressing this loophole by requiring that monthly average crop prices-rather than daily prices- become the basis for determining marketing loan subsidies. This would prevent a one-day drop in crop prices from causing a year-long surge in farm subsidies. Unless Congress acts, farmers will con­tinue to be compensated for low prices that never affect them.

Aid for Questionable Disasters. Lawmakers often supplement generous farm subsidies and sub­sidized crop insurance with annual disaster assis­tance packages. The Washington Post discovered that the USDA encourages disaster declarations for coun­ties without disasters and distributes disaster aid to farmers without requiring proof of any disaster.

Specifically, when the Livestock Compensation Program operated in 2002 and 2003 to compensate farmers for a drought, the majority of payments went to farmers in areas with either moderate drought or none at all. The USDA reportedly urged state and county officials to find anything that could be interpreted as a disaster and use it to qualify the county’s farmers for disaster aid. Consequently, more than 2,000 of the nation’s 3,141 counties were declared agriculture “disasters,” including:

• Whatcom County, Washington, for a distant earthquake that registered only 3 on the local Richter scale and caused no reported damage.
• All 254 counties in Texas for “farm disasters,” such as a storm two years earlier and the Space Shuttle Columbia explosion. This prompted a local farmer to tell reporters, “the livestock pro­gram is a joke, we had no losses, I don’t know what Congress is thinking sometimes.”
• Fifty-three of Wisconsin’s 72 counties, many for a small storm that occurred two years earlier. This prompted local farmers to call the disaster aid an unjustified “waste of money.”

Nor were the individual farmers required to prove any losses. Washington simply sent them disaster assistance checks based on the number of livestock that they owned. In other words, disaster aid was almost completely disconnected from actual disasters.[33]

Livestock disaster assistance is not the only example of misdirected disaster aid. When sweet potatoes became eligible for crop insurance, plant­ing quadrupled, but crop failures surged. Farmers were purposely growing sweet potato crops on unsuited land and skimping on all production costs simply to collect generous crop insurance and disas­ter aid-a practice known as “farming your insur­ance.” Accordingly, the sweet potato insurance program was paying out $16 in insurance claims for every $1 paid in premiums before Congress fixed it in 2005.[34] It is reasonable to assume that this prac­tice continues to some degree in other crops.

The Overall Impact of Farm Policy

Although farm policies serve no legitimate pur­pose, they have profoundly negative effects on tax­payers, consumers, and small farmers, including:

• Higher prices. James Bovard once wrote, “For almost every farm program, there is another equal but opposite farm program or provi­sion.”[35] Commodity subsidies encourage over­production and therefore lower prices. The Conservation Reserve Program encourages underproduction and thereby raises prices. Tar­iffs raise import prices. Export subsidies lower export prices. Price supports triple the price of sugar and raise the price of milk. Calculating the net effect of these contradictory programs, the Organisation for Economic Co-operation and Development estimates that U.S. farm policy raises food prices enough to cost consumers an extra $12 billion annually-in effect, an average annual food tax of $104 per household.[36]
• High taxes. As the farm economy booms, Con­gress is expanding farm subsidies. After averag­ing less than $14 billion per year during the 1990s, annual farm subsidies have topped $25 billion in the current decade since passage of the 2002 farm bill, the most expensive farm bill in American history. All federal spending must eventually be funded by taxes. Thus, these sub­sidies cost the average household $216 in annual taxes in addition to $104 in higher food prices.
• No added rural economic growth. A study by the Federal Reserve Bank of Kansas City con­cluded that farm subsidies do not promote rural economic growth. Between 1992 and 2002, the vast majority of the 783 “farm dependent” coun­ties experienced job growth below the national average. In fact, more of these counties suffered outright job losses than experienced job growth exceeding the national average.[37] While critics can argue that growth would have been worse without subsidies, these policies are clearly not creating new growth centers. Farm subsidies are likely funding farm consolidations, which in turn are reducing employment on farms and in related industries.
• Small farmers driven out of business. Small family farmers are generally not eligible for sig­nificant levels of farm subsidies. Furthermore, subsidies to large commercial farms harm small farmers by (1) reducing crop prices[38] and, there­fore, farmer incomes; (2) raising the prices of farmland, thereby preventing family farmers from expanding; and (3) subsidizing agribusi­ness buyouts of family farms. Small farmers receive virtually none of the subsidies, but they must endure the market distortions and financial pain caused by these policies.
• Less trade. Federal Reserve Chairman Ben Ber­nanke has stated that “the increase in trade since World War II has boosted U.S. annual incomes on the order of $10,000 per household” and that “removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household.” Yet massive tariffs and import restrictions raise food prices and make the American economy less productive. Bring­ing free trade to agriculture would also make free-trade agreements in other industries much more likely.[39]

Conclusion

If Congress takes the path of least resistance and extends current farm policies for another five years, it will have surrendered an enormous opportunity for reform. Most debates over federal programs force lawmakers to balance a program’s social bene­fits with the costs of financing it, but current U.S. farm policies serve no legitimate purpose. They bur­den American families with higher taxes and higher food prices. They harm small farmers by excluding them from subsidies, raising land prices, and financing farm consolidation. They increase trade barriers that reduce incomes in America and in lesser-developed countries. They are falsely pro­moted as saving the family farm and protecting the food supply. In reality, they are America’s largest cor­porate welfare program.

This year’s farm bill debate will test whether Congress is serious about reform or will continue business as usual by pandering to special-interest groups that are working to protect their federal lar­gesse. Congress and President Bush should take a more sensible approach to farm policy this year. Instead of rubberstamping the status quo, they should return to the market-based approach embodied in the 1996 Freedom to Farm Act.

Click here for other charts (Powerpoint)

Brian M. Riedl is Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. Ian Hinsdale, a former Heritage Foundation intern, contributed to this paper.

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[1] Henry Wallace, cited in Oxfam America, “A Vision for the 2007 Farm Bill,” 2007, at www.oxfamamerica.org/resources/files/OA-Fairness_in_the_Fields.pdf (June 4, 2007).

[2 ]Ted Covey et al., “Agriculture Income and Finance Outlook,” AIS-84, U.S. Department of Agriculture, Economic Research Service, November 2006, pp. 40 and 48, at http://usda.mannlib.cornell.edu/usda/current/AIS/
AIS-11-30-2006.pdf (June 4, 2007).

[3] Jerome M. Stam, Daniel L. Milkove, and George B. Wallace, “Indicators of Financial Stress in Agriculture Reported by Agri­cultural Banks, 1982-99,” AIS-74, U.S. Department of Agriculture, Economic Research Service, February 2000, p. 48, and Covey et al., “Agriculture Income and Finance Outlook,” p. 38.

[4] Council of Economic Advisers, Economic Report of the President (Washington, D.C.: U.S. Government Printing Office, 2007), p. 342, Table B-97, at www.gpoaccess.gov/eop/2007/2007_erp.pdf (June 4, 2007).

[5] Covey et al., “Agriculture Income and Finance Outlook,” pp. 40, 48, and 63. Net worth data consist of weighted averages of large and very large farms’ net worths.

[6] U.S. Department of Agriculture, “A Safety Net for Farm Households,” Agriculture Outlook, January-February 2000, pp. 19-24. The authors estimated a cost of $7.8 billion when including everyone who reports any farm income, including “hobby farmers” who have other full-time jobs. Restricting their data to full-time farmers, defined as those working on lower-sales, higher-sales, and large family farms and the fraction of limited-resource farms that are also full-time, the total cost adds up to approximately $4 billion. The eligibility threshold for several federal income-assistance programs, such as the Women, Infants and Children (WIC) program, is 185 percent of the federal poverty level.

[7] U.S. Department of Agriculture, Economic Research Service, “Food Expenditures by Families and Individuals as a Share of Disposable Personal Income data,” Table 7, at www.ers.usda.gov/Briefing/CPIFoodAndExpenditures/Data/table7.htm (June 4, 2007).

[8] Bruce Babcock, “Money for Nothing: Acreage and Price Impacts of U.S. Commodity Policy for Corn, Soybeans, Wheat, Cotton, and Rice,” in American Enterprise Institute, The 2007 Farm Bill and Beyond (Washington, D.C.: AEI Press, 2007), pp. 41-45, at www.aei.org/docLib/20070516_Summary.pdf (June 4, 2007).

[9] The U.S. runs a trade surplus in agriculture. See Economic Research Service, “Value of U.S. Trade-Agricultural, Nonagricultural, and Total-and Trade Balance, by Fiscal Year,” May 2007, at www.ers.usda.gov/Data/FATUS/DATA/fynonag.xls (June 4, 2007).

[10] Julian Alston, “Lessons from Agricultural Policy Reform in Other Countries,” in American Enterprise Institute, The 2007 Farm Bill and Beyond, pp. 83-86.

[11] Economic Research Service, “Farm Income and Costs: Farm Sector Income Forecast,” February 14, 2007, at www.ers.usda.gov/briefing/farmincome/data/cr_t3.htm (June 4, 2007).

[12] The marketing loan program can operate in different ways. It can be a loan that must be partially repaid later in the year (called a marketing loan gain), or the benefit can be paid in a lump sum as a subsidy (called a loan deficiency payment). Despite these distinctions, the net effect is to subsidize farmers up to the marketing loan rate level.

[13] University of Tennessee, Agricultural Policy Analysis Center, “An Analytical Database of U.S. Agriculture, 1950-1999,” 2001, Tables 7.1a and 7.2a.

[14] Paul C. Westcott and C. Edwin Young, “U.S. Farm Program Benefits: Links to Planting Decisions and Agricultural Markets,” U.S. Department of Agriculture, Agriculture Outlook, October 2000, pp. 12-13.

[15] Dan Chapman, Ken Foskett, and Megan Clarke, “How Your Tax Dollars Prop Up Big Growers and Squeeze the Little Guy,” The Atlanta Journal-Constitution, October 1, 2006.

[16] American Farmland Trust, “Farm and Food Policy for All-Farmers, Citizens and Communities,” 2007.

[17] Ralph Chite, “Emergency Funding for Agriculture: A Brief History of Supplemental Appropriations, FY 1989-FY 2006,” Congressional Research Service Report for Congress, updated July 3, 2006. Chite mentions a total of $36.5 billion, and approximately $3.5 billion was added in 2007.

[18] Gilbert Gaul, Dan Morgan, and Sarah Cohen, “Crop Insurers Pile Up Record Profits,” The Washington Post, October 16, 2006.

[19] Ibid. The article includes a graphic showing gains and losses since 1998. The cost of premium subsidies and administrative costs since 1998 were calculated using the 1998-2005 totals listed in the article and then projecting forward for the 2006 and 2007 totals.

[20] John Frydenlund, “Farm Subsidies: Myth and Reality,” Citizens Against Government Waste Issue Brief No. 1, April 3, 2007, at www.cagw.org/site/DocServer/2007_Farm_Bill-_
Issue_Brief_1.pdf?docID=2121 (June 4, 2007).

[21] Elizabeth Becker, “Land Rich in Subsidies, and Poor in Much Else,” The New York Times, January 22, 2002, p. A14.

[22] Council of Economic Advisers, Economic Report of the President, p. 175.

[23] See Environmental Working Group, Farm Subsidy Database, at http://www.ewg.org/farm (June 4, 2007).

[24] Covey et al., “Agriculture Income and Finance Outlook,” pp. 40, 48, and 63.

[25] Dean Kleckner, “Farm Subsidies Are Not Saving the Family Farm,” updated manuscript. Copy available upon request.

[26] For a list of subsidy totals, see Environmental Working Group, Farm Subsidy Database. Corporate totals include subsidiaries. Subsidies for lawmakers are described in detail in Ronald D. Utt, Ph.D., “How to Discourage Conflicts of Interest in the Federal Agriculture Subsidy Programs,” Heritage Foundation Backgrounder, forthcoming.

[27] John Lancaster, “More Subsidy Money Going to Fewer Farms,” The Washington Post, January 24, 2002, and Environmental Working Group, Farm Subsidy Database.

[28] Dan Chapman, Ken Foskett, and Megan Clarke, “How Savvy Growers Can Double, or Triple, Subsidy Dollars,” The Atlanta Journal-Constitution, October 2, 2006.

[29] Economic Research Service, “Farm Income and Costs.”

[30] Dan Morgan, Gilbert Gaul, and Sarah Cohen, “Farm Program Pays $1.3 Billion to People Who Don’t Farm,” The Washington Post, July 2, 2006.

[31] Dan Morgan, Sarah Cohen, and Gilbert Gaul, “Growers Reap Benefits Even in Good Years,” The Washington Post, July 3, 2006.

[32] Ibid.

[33] Gilbert Gaul, Dan Morgan, and Sarah Cohen, “No Drought Required for Federal Drought Aid,” The Washington Post, July 18, 2006.

[34] Gilbert Gaul, “Farming Your Insurance,” The Washington Post, October 15, 2006.

[35] James Bovard, “Farm Bill Follies of 1990,” Cato Institute Policy Analysis No. 135, July 12, 1990, at www.cato.org/pubs/pas/pa135.html (June 8, 2007).

[36] Organisation for Economic Co-operation and Development, Agricultural Policies in OECD Countries: At a Glance (Paris: OECD Publishing, 2006), p. 69, Table 2.12. The 2003-2005 average annual transfer from consumers was $12.285 billion.

[37] Mark Drabenstott, “Do Farm Payments Promote Rural Economic Growth?” Federal Reserve Bank of Kansas City, Center for the Study of Rural America, The Main Street Economist, March 2005, at www.kc.frb.org/RegionalAffairs/mainstreet/MSE_0305.pdf (June 4, 2007).

[38] Although conservation programs raise prices, it is still clear that commodity subsidies reduce prices relative to what they would be with only conservation programs.

[39] Ben S. Bernanke, Federal Reserve Chairman, “Embracing the Challenge of Free Trade: Competing and Prospering in a Global Economy,” remarks at the Montana Economic Development Summit 2007, Butte, Montana, May 1, 2007, at www.federalreserve.gov/boarddocs/Speeches/2007/
20070501/default.htm (June 4, 2007).

China and India lose their appeal for investors on inflation fears

Fund managers are still super-bullish on Russia, betting that the energy boom has life yet. A net 62pc are overweight oil and gas shares. The most hated trio are travel and leisure (-66), banks (-62) and property (-60).

Karen Olney, Merrill’s European equity strategist, said oil is nearing its cycle peak. “Is the trade too crowded? Probably. As long as fundamentals remain strong, we retain our overweight stance,” she said.

“The burning question is when to sell oil companies and move back to banks.

• RBS issues global crash alert
• Read more by Ambrose Evans Pritchard

“We resist the temptation. The time is nearer when inflation rolls over, towards the end of this year and certainly into 2009.”

A record number (net 29pc) are now underweight on European equities; many have switched into cash as they wait for the European Central Bank to inflict punishment – ever more likely after eurozone inflation reached an all-time high of 3.7pc in May.

The ECB’s chief economist, Jurgen Stark, said yesterday that the price spike was a “cause for alarm”.

Mr Bowers said Europe is now facing a triple whammy as the downturn in global export markets combines with a strong euro and a monetary squeeze.

“Eurozone retail sales have been worse than in the US on a year-on-year basis and eurozone GDP growth has also been worse,” he said. “If you look at Spain and Italy, and even France, they are very weak.

• More on economics
• BoE warns life will get worse

“The Fed has eased dramatically, but the ECB hasn’t eased at all. It intends to tighten regardless of the consequences on growth. This is what is eating away at confidence in Europe,” he said.

Merrill Lynch said fund managers were belatedly adapting to a global inflation shock that poses a serious danger to asset prices, and risks setting off “civil protest” in Argentina, Indonesia, South Africa and the Gulf states.

As the new story unfolds, America is coming back into favour, emerging as a sort of safe haven in a fast-changing world where trusted institutions command a premium. Investors are quietly rotating back into Wall Street – despite a chorus of pessimists. A net 23pc are overweight US equities, the highest since August 2001.

The long awaited “decoupling” has begun.

The United States looks like the winner after all.

RBS issues global stock and credit crash alert

By Ambrose Evans-Pritchard, International Business Editor

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

“A very nasty period is soon to be upon us – be prepared,” said Bob Janjuah, the bank’s credit strategist.

A report by the bank’s research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as “all the chickens come home to roost” from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

Such a slide on world bourses would amount to one of the worst bear markets over the last century.

• RBS alert: Quotes from the report
• Fund managers react to RBS alert
• Support for the euro is in doubt

RBS said the iTraxx index of high-grade corporate bonds could soar to 130/150 while the “Crossover” index of lower grade corporate bonds could reach 650/700 in a renewed bout of panic on the debt markets.

“I do not think I can be much blunter. If you have to be in credit, focus on quality, short durations, non-cyclical defensive names.

“Cash is the key safe haven. This is about not losing your money, and not losing your job,” said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

RBS expects Wall Street to rally a little further into early July before short-lived momentum from America’s fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.

“Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point,” he said.

US Federal Reserve and the European Central Bank both face a Hobson’s choice as workers start to lose their jobs in earnest and lenders cut off credit.

The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. “The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation,” he said.

• Morgan Stanley warns of catastrophe
• More comment and analysis from the Telegraph

“The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets,” he said.

Kit Jukes, RBS’s head of debt markets, said Europe would not be immune. “Economic weakness is spreading and the latest data on consumer demand and confidence are dire. The ECB is hell-bent on raising rates.

“The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB. Wider spreads between the German Bunds and peripheral markets seem assured,” he said.

Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.

Homes foreclosure more than doubled in 1Q from 2007

Tuesday April 29, 6:18 am ET, by Alex Veiga, AP Business Writer

Number of US homes facing foreclosure jumps 112 percent in first quarter from 2007 LOS ANGELES (AP) — The number of U.S. homes heading toward foreclosure more than doubled in the first quarter from a year earlier, as weakening property values and tighter lending left many homeowners powerless to prevent homes from being auctioned to the highest bidder, a research firm said Monday.

Among the hardest hit states were Nevada, Florida and, in particular, California, where Stockton led the nation with a foreclosure rate that was 6.6 times the national average, Irvine, Calif.-based RealtyTrac Inc. said.

Nationwide, 649,917 homes received at least one foreclosure-related filing in the first three months of the year, up 112 percent from 306,722 during the same period last year, RealtyTrac said.

The latest tally also represents an increase of 23 percent from the fourth quarter of last year.

RealtyTrac monitors default notices, auction sale notices and bank repossessions.

All told, one in every 194 households received a foreclosure filing during the quarter. Foreclosure filings increased in all but four states.

The most recent quarter marked the seventh consecutive quarter of rising foreclosure activity, RealtyTrac noted.

“What would normally alleviate the foreclosure situation in a normal market is people starting to buy properties again,” said Rick Sharga, RealtyTrac’s vice president of marketing.

However, the unavailability of loans for people without perfect credit and a significant down payment is slowing the process, he said.

“It’s a cycle that’s going to be difficult to break, and we’re certainly not at the breaking point just yet,” Sharga added.

The surge in foreclosure filings also suggests that much-touted campaigns by lawmakers and the mortgage lending industry aimed at helping at-risk homeowners aren’t paying off.

Hope Now, a Bush administration-organized mortgage industry group, said nearly 503,000 homeowners had received mortgage aid in the first quarter. Most of the aid was temporary, however.

Pennsylvania was a notable standout in the latest foreclosure data. The number of homes in the state to receive a foreclosure-related filing plunged 24.4 percent from a year earlier.

Sharga credited the decline to the state’s foreclosure relief measures, noting that cities such as Philadelphia put in place a moratorium on all foreclosure auctions for April and implemented other measures aimed at helping slow foreclosures.

Nearly 157,000 properties were repossessed by lenders nationwide during the quarter, according to RealtyTrac.

The flood of foreclosed properties on the market has contributed to falling or stagnating home values, yet lenders have yet to implement heavy discounts on repossessed homes, Sharga said.

Nevada posted the worst foreclosure rate in the nation, with one in every 54 households receiving a foreclosure-related notice, nearly four times the national rate.

The number of properties with a filing increased 137 percent over the same quarter last year but only rose 3 percent from the fourth quarter.

California had the most properties facing foreclosure at 169,831, an increase of 213 percent from a year earlier. It also posted the second-highest foreclosure rate in the country, with one in every 78 households receiving a foreclosure-related notice.

California metro areas accounted for six of the 10 U.S. metropolitan areas with the highest foreclosure rates in the first quarter, RealtyTrac said.

Many of the areas — including Stockton, Riverside-San Bernardino, Fresno, Sacramento and Bakersfield — are located in inland areas of the state where many first-time buyers overextend themselves financially to buy properties that have plunged in value since the market peak.

“California still hasn’t hit bottom,” Sharga said. “We have a lot of California homes that are in early stages of default that may not be salvageable because either there’s no market or financing available, or both.”

Arizona had the third-highest foreclosure rate, with one in every 95 households reporting a foreclosure filing in the quarter. A total of 27,404 homes reported at least one filing, up nearly 245 percent from a year ago and up 45 percent from the last quarter of 2007.

Florida had 87,893 homes reporting at least one foreclosure filing, a 178 percent jump from the first quarter of last year and a 17 percent hike from the fourth quarter last year. That translates into a foreclosure rate of one in every 97 households.

The other states among the top 10 with the highest foreclosure rates were Colorado, Georgia, Michigan, Ohio, Massachusetts and Connecticut.

RealtyTrac Inc.: http://www.realtytrac.com

Poor Haitians Resort to Eating Dirt Mud Cakes

Rising Food Costs Force Haiti’s Poor to Resort to Eating Dirt

PORT-AU-PRINCE, Haiti

It was lunchtime in one of Haiti’s worst slums, and Charlene Dumas was eating mud. With food prices rising, Haiti’s poorest can’t afford even a daily plate of rice, and some take desperate measures to fill their bellies. Charlene, 16 with a 1-month-old son, has come to rely on a traditional Haitian remedy for hunger pangs: cookies made of dried yellow dirt from the country’s central plateau.

The mud has long been prized by pregnant women and children here as an antacid and source of calcium. But in places like Cite Soleil, the oceanside slum where Charlene shares a two-room house with her baby, five siblings and two unemployed parents, cookies made of dirt, salt and vegetable shortening have become a regular meal.

Yolen Jeunky arranges dried mud cookies for sale in a bucket in Cite Soleil in Port-au-Prince, Nov. 29, 2007. (Ariana Cubillos/ AP Photo)

“When my mother does not cook anything, I have to eat them three times a day,” Charlene said. Her baby, named Woodson, lay still across her lap, looking even thinner than the slim 6 pounds 3 ounces he weighed at birth.

Though she likes their buttery, salty taste, Charlene said the cookies also give her stomach pains. “When I nurse, the baby sometimes seems colicky too,” she said.

Food prices around the world have spiked because of higher oil prices, needed for fertilizer, irrigation and transportation. Prices for basic ingredients such as corn and wheat are also up sharply, and the increasing global demand for biofuels is pressuring food markets as well.

A woman dries mud cookies in the sun on the the roof of Fort Dimanche, once a prison, in Port-au-Prince, Haiti, Nov. 29, 2007. Rising prices and food shortages are threatening Haiti’s fragile stability, and the mud cookies, made of dirt, salt and vegetable shortening, are one of very few options the poorest people have to stave off hunger. (Ariana Cubillos/ AP Photo)

The problem is particularly dire in the Caribbean, where island nations depend on imports and food prices are up 40 percent in places.

The global price hikes, together with floods and crop damage from the 2007 hurricane season, prompted the U.N. Food and Agriculture Agency to declare states of emergency in Haiti and several other Caribbean countries. Caribbean leaders held an emergency summit in December to discuss cutting food taxes and creating large regional farms to reduce dependence on imports.

At the market in the La Saline slum, two cups of rice now sell for 60 cents, up 10 cents from December and 50 percent from a year ago. Beans, condensed milk and fruit have gone up at a similar rate, and even the price of the edible clay has risen over the past year by almost $1.50. Dirt to make 100 cookies now costs $5, the cookie makers say.

The hand of a woman is covered in mud as she makes mud cookies on the roof of Fort Dimanche, Nov. 30, 2007. (Ariana Cubillos/ AP Photo)

Still, at about 5 cents apiece, the cookies are a bargain compared to food staples. About 80 percent of people in Haiti live on less than $2 a day and a tiny elite controls the economy.

Merchants truck the dirt from the central town of Hinche to the La Saline market, a maze of tables of vegetables and meat swarming with flies. Women buy the dirt, then process it into mud cookies in places such as Fort Dimanche, a nearby shanty town.

Carrying buckets of dirt and water up ladders to the roof of the former prison for which the slum is named, they strain out rocks and clumps on a sheet, and stir in shortening and salt. Then they pat the mixture into mud cookies and leave them to dry under the scorching sun.

The finished cookies are carried in buckets to markets or sold on the streets.

A reporter sampling a cookie found that it had a smooth consistency and sucked all the moisture out of the mouth as soon as it touched the tongue. For hours, an unpleasant taste of dirt lingered.

Assessments of the health effects are mixed. Dirt can contain deadly parasites or toxins, but can also strengthen the immunity of fetuses in the womb to certain diseases, said Gerald N. Callahan, an immunology professor at Colorado State University who has studied geophagy, the scientific name for dirt-eating.

Haitian doctors say depending on the cookies for sustenance risks malnutrition.

Yolen Jeunky prepares cookies made of dirt, water, salt and butter on the the roof of Fort Dimanche. (Ariana Cubillos/ AP Photo)

“Trust me, if I see someone eating those cookies, I will discourage it,” said Dr. Gabriel Thimothee, executive director of Haiti’s health ministry.

Marie Noel, 40, sells the cookies in a market to provide for her seven children. Her family also eats them.

“I’m hoping one day I’ll have enough food to eat, so I can stop eating these,” she said. “I know it’s not good for me.”

By JONATHAN M. KATZ Associated Press Writer
Jan 29, 2008
The Associated Press

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

The cost of food: facts and figures

Explore the facts and figures behind the rising price of food across the globe.

The World Bank has announced emergency measures to tackle rising food prices around the world.

World Bank head Robert Zoellick warned that 100 million people in poor countries could be pushed deeper into poverty by spiralling prices.

The crisis has sparked recent food riots in several countries including Haiti, the Philippines and Egypt.

The World Bank endorsed Mr Zoellick’s “new deal” action plan for a long-term boost to agricultural production.

Emergency help would include an additional $10m (£5m) to Haiti, where several people were killed in food riots last week, and a doubling of agricultural loans to African farmers.

Starvation risk

Mr Zoellick’s proposals were endorsed by the World Bank’s steering committee of finance and development ministers at a meeting in Washington.

We have to put our money where our mouth is now so that we can put food into hungry mouths
Robert Zoellick
World Bank head

The World Bank and its sister organisation, the IMF, have held a weekend of meetings that addressed rising food and energy prices as well as the credit crisis upsetting global financial markets.

The leader of the International Monetary Fund last week said hundreds of thousands of people were at risk of starvation because of food shortages.

Prices have risen sharply in recent months, driven by increased demand, poor weather in some countries that has ruined crops and reduced production area, thanks to an increase in the use of land to grow crops for transport fuels.

The price of staple crops such as wheat, rice and corn have all risen, leading to an increase in overall food prices of 83% in the last three years, the World Bank has said.

GLOBAL FOOD PRICE RISES
Wheat: 130%
Soya: 87%
Rice: 74%
Corn: 31%
Time: Year to March 2008
Source: Bloomberg

The sharp rises have led to protests and unrest in many countries, including Egypt, Ivory Coast, Ethiopia, the Philippines and Indonesia.

In Haiti, protests last week turned violent, leading to the deaths of five people and the fall of the government.

Restrictions on rice exports have been put in place in major producing countries such as India, China, Vietnam and Egypt.

Importers such as Bangladesh, the Philippines and Afghanistan have been hit hard.

Rich urged to act

“We have to put our money where our mouth is now so that we can put food into hungry mouths,” Mr Zoellick said. “It’s as stark as that.”

He called for more aid to provide food to needy people in poor countries and help for small farmers. He said the World Bank was working to provide money for seeds for planting in the new season.

He also urged wealthy donor countries to quickly fill the World Food Programme’s estimated $500m (£250m) funding shortfall.

Mr Zoellick’s “New Deal for Global Food Policy” also seeks to boost agricultural policy in poor countries in the longer-term.

On Saturday, the head of the IMF, Dominique Strauss-Kahn, warned of mass starvation and other dire consequences if food prices continued to rise sharply.

“As we know, learning from the past, those kind of questions sometimes end in war,” he said.

He said the problem could lead to trade imbalances that may eventually affect developed nations, “so it is not only a humanitarian question”.

Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/1/hi/business/7344892.stm

Published: 2008/04/14 11:02:54 GMT

Zimbabwe inflation breaks 100,000%

Zimbabwe inflation breaks 100,000%

The official rate of annual inflation in Zimbabwe has rocketed past the 100,000% barrier – by far the highest in the world.

The government statistics office said inflation rose to 100,580% in January, up from 66,212% in December.

The new official figure was still well below the rate calculated by independent analysts who estimate the real rate is closer to 150,000%.

They give as examples supermarket receipts showing the price of chicken rose more than 236,000% to 15 million Zimbabwe dollars, or about 50p a pound between January 2007 and January 2008. Slightly lower increases in prices of sugar, tea and other basics brought down the overall average inflation to around 150,000%.

Zimbabwe, a former regional breadbasket, is facing acute shortages of food, hard currency, gasoline and most basic goods in an economic meltdown blamed on disruptions in the agriculture-based economy after the often-violent seizures of thousands of white-owned commercial farms began in 2000 accompanied by political violence and turmoil.

Economic hardship is a key issue in national elections scheduled for March 29 in which President Robert Mugabe, who is 84 on Friday, is facing the biggest challenge to his hold on power since he led the nation to independence in 1980.

Inflation, food shortages and the crumbling of power, water, sanitation, roads, phones and communications and other utilities have fuelled deep divisions in the ruling Zanu-PF party.

In early October, the state central statistical office gave official inflation at just below 8,000%. It then suspended its monthly updates on inflation because there was not enough in the shortage-stricken shops to calculate a regular basket of goods.

November’s already dizzying rate of 24,470% was announced in January and earlier this month the official rate for December was given as 66,212%, a dramatic escalation in the space of a month.

The National Incomes and Prices Commission, the government’s price control body, this month allowed sharp increases in the prices of the corn meal staple, sugar, bread and other basics in a bid to restore viable operations by producers and return the goods to empty shelves. But the new prices were still roughly half the price demanded on the black market and were unlikely to guarantee regular supplies to food stores.