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Benson's Economic & Market Trends

July 18, 2011

"PIGS FLY AND PRICES GO NUTS"

When business slows down over the summer months, I finally have some time to reflect and do a little economic detective work and, yes, an occasional jig saw puzzle.   Trying to figure out what is going on in the world these days is extraordinarily similar to putting the pieces of a puzzle together.  Within the pile of pieces, you know there's a picture somewhere but until you snap those last few pieces into place, the puzzle won't be complete.

The latest puzzle I wanted to solve began when I went to the supermarket and picked up one of the few items my wife let's me buy, which is a large jar of cashews.   I seem to recall a few years ago they were $7, last year, they spiked to $11, and now, suddenly, they're $15.  Because my beloved nuts rose in price so much it has driven me nuts, and I had to understand why!

Numerous articles that I've read recently in the financial press and elsewhere about China have put some pieces of the puzzle into place.  In one, the Chinese apparently have developed a real taste for cashews and are buying them up left and right, driving up the price.  In another, an article titled "Pigs Fly" in the Wall Street Journal mentioned hog prices and raising the daily limit on China buying American pork.  Now, just as the Chinese are buying massive amounts of American corn and other grains, front page news shows both a massive heat wave and long-term drought in the US gravely affecting agriculture.  Higher demand and restricted supply are forcing food prices up. 

The Chinese love pork which amounts to over half of the meat they consume.  Needless to say, the price of this meat is up 38 percent since the beginning of this year, which is a national concern in China.  Fearing food riots, the Chinese government has recently released a large quantity of frozen pork from their strategic pork reserves to keep up with demand.

While America and other countries have strategic oil reserves, only China has a strategic pork reserve which tells you how important the price of hogs (and other food items) is.   Food prices in China have been rising about 13% in the past year.

Normally, I wouldn't make much of a connection between pigs flying and the price of nuts, but China's policy last year to double the wages of working Chinese by offering wage hikes of 20 percent, and another 20 percent this year, was intended to prevent food riots.  As long as the government keeps their promise going forward to raise wages, workers can continue to buy their sacred pigs.  Feeding pigs requires more corn.  Indeed, higher wages in China wouldn't be a big issue for America except for the fact that there are 1.3 billion Chinese, they're hungry, and now they have cash to spend.  Another key piece to the puzzle just snapped into place!

The Chinese government is also still running trade surpluses selling Americans manufactured doodads and toys, and has amassed over $3 trillion in foreign exchange reserves they can use to spend on hogs, cows, chickens, corn, wheat, soybeans, rice, nuts, and anything else they may need to eat.  Indeed, China could buy every bushel of grain and every farm animal in America with the money we have given them, and hardly dent their foreign exchange holdings.

So, when I look at the last piece of this summer's puzzle, the picture is pretty clear.  If you're an American, it's not a pretty picture.  Food prices are not going to be determined by Americans, whose wages and jobs are stagnant.  Food prices are going to be determined by the Chinese who outnumber us four to one, and whose wages are soaring, and whose government has over $3 trillion in spare change to buy food for them.  So, when you go to the supermarket because you want to get something to eat you might not be able to afford it.  China will likely buy our food with our money, and just leave us the scraps.  For the next few years, count on food prices continuing to go nuts!