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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!
Richard Benson
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