Sarkozy Calls for G-20 to Regulate Commodities, a New G-Club to Tackle Currencies; Is there a "Grain Shortage"? Price Control Madness

French President Nicolas Sarkozy is now convinced the recovery is real and the only thing left to do is tie up some loose ends. He thinks the most pressing G-need is for the G-20 to regulate commodities and that is the right size of the group.

In contrast, Sarkozy thinks the G-20 is too large and unwieldy to tackle currencies. He proposes a G-5 or G-14 or some other unknown G-number hoping to hit the magic G-spot.

Bloomberg reports Sarkozy Calls for G-20 to Regulate Commodities, Price Swings

French President Nicolas Sarkozy said regulation of commodity markets will be a priority as he leads the Group of 20 nations this year, and inaction may cause food rioting in the world’s poorest countries.

“If we do nothing, we risk having food riots in the poorest countries and also an unfavorable impact on global growth,” Sarkozy said. “We want regulation of the financial markets for commodities.”

Global food security may face a threat from “excessive price volatility and speculation,” farm ministers from 48 countries said in a joint statement in Berlin on Jan. 22. World food prices rose to a record in December, according to the United Nations, and a jump in food costs helped spark deadly riots in Algeria and Tunisia this month.

Information on physical-commodity stockpiles must be improved, said Sarkozy, who proposed creating a shared database similar to one that exists for oil. When Russia last year banned grain exports after a crop-damaging drought, “there wasn’t a single calculation on the exact state of stocks,” he said.

One of the rules France proposes is for commodity investors to set aside a deposit equal to part of the value of the raw material being traded, according to the president.

“Does it make sense that you can buy considerable stocks of commodities without running any risk, without blocking any sum, without committing to any cargo delivery?” Sarkozy said.

Excuse me for asking but since when can you "buy considerable stocks of commodities without running any risk"?

Bear in mind regulatory proposal is from the same country that thought it could regulate solar energy. If you want to read a hilarious escapade regarding those solar energy regulations, please see Sunday Funnies 2011-01-23 Student Loans; Solar Energy Madness in Europe.

Solar energy madness aside, if Sarkozy wants futures buyers to commit to take delivery, he will wreck the futures market in grains, while exacerbating shortages in commodities that can easily be stored and transported, such as gold, silver, and copper.

Sarkozy Wants New "G-Club" to Address Currency Issues

On the basis twenty is too "unwieldy" Sarkozy Said to Seek Club of Nations to Address Currency Issues

French President Nicolas Sarkozy wants to persuade the Group of 20 nations to establish a smaller forum to address global currency issues because the larger body is too unwieldy, three French government officials said.

“The French appear to want a smaller group of countries to address currency matters because the G-20 looks too large and the G-7 too small,” said Gerard Lyons, chief economist at Standard Chartered Bank in London.

Possible outcomes include opening the G-7 to China or shrinking it to a G-5, with one euro-region representative, the officials said. Other emerging economies could also join, they said. The G-7 comprises the U.S., Japan, Germany, the U.K., France, Canada and Italy. Russia makes it the G-8.

Sarkozy has regularly complained that the euro is too strong against the yuan and the yen, hurting European export competitiveness. The euro is 8.2 percent overvalued against the dollar even after weakening 4 percent in the past 12 months, according to an index compiled by the Organization for Economic Cooperation and Development.

The most “pragmatic” decision would be to add Brazil, Russia, India and China to a G-7 where euro countries would merge in order to “keep it smaller than the G-20 and by that way more powerful in terms of quick decisions,” said Sebastian Wanke, an economist at Dekabank in Frankfurt.

Finance Minister Christine Lagarde has hinted at the French plans. In October in Washington, she said she was “not sure that 20 is the absolute right number” to “discuss effectively currencies.” Earlier this month, Lagarde wished journalists luck in explaining G-20 talks, including how to “legitimize the existence of a G-5 rather than a G-14 or a G-20.”

I hope you find this search for the "absolute right" G-spot humorous, because there is certainly nothing of substance in the above debate.

It matters not whether the group is 5, 8, 14, or 20, it is not going to accomplish a damn thing until there is an earth-shaking crisis, and then the most likely result will be to make matters worse.

U.S. farmers called to plant more acres

The Watertown Daily Times reports on the "Grain Shortage"

Grain production shortages around the world and high grain prices are calling for American farmers to plant every acre they can this spring, the Wall Street Journal reported.

Farmers will need to sow an additional 10 million acres to boost supplies of several crops. Supplies are expected to drop to 15-year lows for corn and more than 40-year lows for soybeans, according to the U.S. Department of Agriculture.

Analysts are calling for 327 million acres to be planted, which will require converting animal grazing pastures to cropland, sowing marginal lands, in some cases planting an acre twice in the same year and planting under questionable weather conditions.

Gee, let's plant on flood plains, in questionable weather, and to make thing really efficient let's pay farmers to not grow corn on their driveways and tennis courts they don't have.

A quick search for "food shortage" uncovers articles all the way back to 1974, most of them full hype about global warming or the falling dollar. One article was on "food control genocide".

There are food shortages of course, but most of them are caused by political turbulence, unsustainable local population growth patterns, price controls, or various weather-related natural disasters.

Potato Price Controls in Russia

Russia has learned nothing from history regarding disastrous central planning efforts. Its Deputy Economic Minister says Food Price Control Possible

The government may impose a maximum price level for some foods, such as potatoes, as it faces elevating inflationary pressure, Deputy Economic Minister Andrei Klepach said Monday.

Klepach said, however, that the government has not discussed any proposals yet. “I just do not exclude this, and it is envisaged by legislation that we can use this kind of means,” Klepach said. Parliamentary elections are due in December, and voters cite high prices as a top concern in opinion polls.

Food, Cotton Price Controls in China

In November China Announced Price Controls to Tackle Food Inflation

China will unveil food price controls and crack down on speculation in agricultural commodities to contain inflationary pressure that its central bank governor highlighted as a risk on Tuesday.

With consumer prices rising at their fastest pace in more than two years, the National Development and Reform Commission, the country's top planning agency, is preparing a "one-two punch" of actions to rein in food costs, official media reported.

Such direct intervention would mark an escalation of the government's efforts to tame inflation and underline its worries over the rapid run-up in food prices.

Possible steps include price controls, subsidies for shoppers, a crackdown on hoarding and price gouging as well as a system whereby mayors are made responsible for a basket of food items, the China Securities Journal reported.

Those found speculating on corn or cotton will also be punished severely, it added.

Emerging Nations Tackle Food Costs

The Wall Street Journal reports Emerging Nations Tackle Food Costs

Fast-growing emerging nations are taking increasingly aggressive actions to beat back rising food prices as they grow more worried of threats to stability if prices don't start to retreat.

Developing-market governments have unveiled a laundry list of measures—including price caps, export bans and rules to counter commodity speculation—to keep food costs from disrupting their economies as price spikes that some had hoped were temporary have stretched into the new year.

In the latest indication of concern, Indonesia said Thursday it will remove import tariffs on more than 50 items including wheat, soybeans, fertilizer and animal feed in an effort to slow the rise in food prices. Indonesia is also planning to raise taxes on palm-oil exports to 25% from 20% next month, according to a government official familiar with the matter.

Bad weather, more-affluent populations and underinvestment in agriculture have pushed up prices of everything from wheat, rice and onions in India, chilies in Indonesia and water spinach in China. Some point to low interest rates in the U.S., Japan and Europe, as investors use cheap financing to invest in globally traded commodities such as rice, sugar, cotton and oil, driving their prices higher. Soy bean prices in the past six months have risen 46% to more than $14 a bushel at the Chicago Board of Trade. Sugar, while lower than in November, is still up 34% over six months ago to around 31 cents a pound in Intercontinental Exchange trading.

In response to the price pressures, India earlier this month extended bans on exporting lentils and cooking oil. It also struck a deal with archrival Pakistan to import 1,000 tons of onions, a key cooking ingredient whose price has skyrocketed after floods.

China, Korea Moves Underscore Rising Food Prices

The Huffington Post reports China, Korea Moves Underscore Rising Food Prices

China dumped plans to import several million tonnes of expensive corn in 2011 and South Korea unveiled cuts in import tariffs on some products, underscoring the dilemma over how to tackle rising food prices.

In India, where vegetable prices have risen more than 70 percent in the past year, the finance minister said the government would unveil measures later on Thursday to combat inflation.

World food prices hit a record high in December after adverse weather affected crops, the UN's food agency said in a report last week that raised concerns about inflation, protectionism and social unrest -- factors that contributed to the 2008 food crisis.

Wheat prices rose 47 percent last year, corn more than 50 percent and U.S. soybeans by 34 percent. The U.N. Food and Agricultural Organization (FAO) said in its report key grains prices could rise further, a view underlined by a U.S. report published on Wednesday.

The U.S. Department of Agriculture report reduced estimates for U.S. corn and soybean harvests, trimmed its corn and soy output forecast for drought-hit Argentina and cuts its outlook for wheat production in flood-hit Australia.

The report sent grains prices soaring and the rally continued in Asia on Thursday.

The rise in food prices so far has led to differing responses from governments, pointing to the difficulty of how to handle the issue.

For China, corn prices are just too high, so it has canned a proposal to import millions of tonnes of the grain in 2011, two industry sources with knowledge of the plan said on Thursday.

The initial Chinese proposal had been drawn up as a way to combat food inflation, a worry for Beijing because China's food inflation is running in double digits.

China was a major factor behind the 2010 rally in corn prices after it imported about 1.5 million tonnes from the United States to mark its first major purchase in 15 years.

India's main price measure, the wholesale price index, showed inflation at 7.48 percent in November, which analysts said would prompt the central bank this month to raise interest rates.

India's food inflation is the highest among major economies in Asia and is an issue particularly sensitive to the government because roughly two out of every five Indians live on less than $1.25 a day, the World Bank's measure of poverty.

Finance Minister Pranab Mukherjee called on Thursday for calm, saying: "We have analyzed the situation. We have indicated what further steps we are going to take. We have also indicated there should not be any unnecessary panic."

In regards to the last sentence above, I have to ask: what about necessary panic?

How To Create Shortages in One Simple Lesson

The easiest way to create excess capacity is for bureaucrats to offer price supports or subsidies. Conversely, the easiest way to create shortages is for bureaucrats to implement price controls.

Little can be done about flooding in Australia, or droughts in South America.

However, massive credit expansion and money supply growth in China and India have fueled rising food prices. In the US, fed-induced liquidity measures have fueled commodity speculation. However, rising futures prices have not made it far up the chain in US retail prices, except for energy.

For a discussion, please see ...

• No Such Thing as Cost-Push Inflation; Demographics and the "Demand for Money"


• Huge Margin Squeeze: Restaurants, Hotels, Cruise Lines Unable to Pass on Rising Food and Energy Prices; China's Role in Commodity Bubble

Every country wants to "stimulate exports" by printing money to weaken their currencies. Those actions exacerbate the weather-related problems.

Price controls will make matters still worse by causing hoarding and localized shortages. Unfortunately, this is the path many nations have taken.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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