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Posts Tagged ‘hoarding

East Asia food – noodle wheat shortage and ginger-garlic speculation

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Supermarket 'udon', similar to Ramen. Photo Wikipedia

Noodle wheat? Japan and South Korea need a lot of it every year, about 800,000 tons according to industry estimates from West Australia. Noodle grade wheat requires careful blending to produce the appropriate flour. Japanese and South Korean-type noodles, such as the ‘udon‘ variety, require specialist wheat grades unlike the noodles commonly seen elsewhere, which are made from a more standard flour.

But, as Agrimoney reports, the drought in Western Australia threatens to land Japan and South Korea with a noodle shortage unless supplies of specialist wheat are carefully administered. Agrimoney has quoted top exporter CBH Group, which handles virtually all Western Australia’s grain harvest. West Australian wheat producers are worrying about how to supply noodle-grade wheat while dealing with a near-halving, to below 4m tonnes, in the state’s wheat production.

Noodle wheat typically accounts for 13-14% the state’s wheat crop. Now the shortage means noodle wheat is commanding a premium, currently at Aus$35 a tonne, which is likely to attract “opportunistic” merchants with little experience of handling the blend. Wheat growers in West Australia are being warned to avoid selling to a merchant whose bad handling of the blend might unsettle West Australia’s valuable grain trade relations with two important Asian clients.

Meanwhile, the Economic Observer of China (English) examines produce speculation in China’s agricultural market. Products being targeted according to the newspaper are garlic, ginger, honeysuckle and green beans.

Like many Japanese noodles, udon noodles are served chilled in the summer and hot in the winter. Photo Wikipedia

Shandong’s Jinxiang produces over 6 million ‘mu’ (a ‘mu’ is about 800 sq metres) of garlic. “Garlic is a reliable crop and garners steady expectations and consequently produces strong market liquidity,” said the Economic Observer. “Strong market liquidity and the availability of rural brokers, all contribute to the rapid influx of hot money. The rising price of garlic has attracted local and outside speculators.” Ginger prices have fluctuated significantly in the past few years. The newspaper reports that ginger prices were at a low of 0.4 yuan/kilo in 2008, and then skyrocketed to 4.6 yuan/kilo this year. “Speculating on ginger can generate huge profits. Like the garlic market, most of the money goes to brokers and middlemen.”

One third of prescription medications in China list honeysuckle as an ingredient; 70% of cold and flu medications use honeysuckle. “The price of honeysuckle has risen 400% this yearm” reports the Economic Observer. “Annual national demand is at 20 million kilograms but actual output hovers at 8 million kilograms. Supply of honeysuckle is dependent on distributors, who are hoarding.” Prices of green beans have surged in the past year, from 6.8 yuan/kilo to 24 yuan/kilo. “The green bean trading volume in Taonan has reached over 40 million tons, one fourth of the entire domestic market. However, most farmers have not profited from the market surge because of poor timing, pressure to pay back loans, and planting costs.”

In an extraordinary meeting, FAO sizes up the turmoil in world cereal markets

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The FAO’s Committee on Commodity Problems has just concluded its Extraordinary Joint Intersessional Meeting of the Intergovernmental Group on Grains and the Intergovernmental Group on Rice (held in Rome, 24 September 2010). The Food and Agriculture Organization of the UN does not, it appears, want to cause any alarm bells to be rung in countries already worried by food inflation, and that is why its overall advise is at odds with the details highlighted during the day-long consultations.

Here are the main points of an advisory titled ‘Turmoil in Global Cereal Markets: Outlook for 2010-11, Short-Term Risks & Uncertainties’:

La Nina (colder-than-normal sea-surface temperatures in the Pacific Ocean) often results in drier periods in Argentina and southern Brazil but wetter weather in Asia. It may strengthen through January
Any downgrading of wheat crops in southern hemisphere countries before harvest this year- Western Australia not so good
The final maize harvest in the USA (and China) – production may end up lower
Adverse growing conditions affecting secondary rice crops in Asia and main crops in southern hemisphere
Drought in Russia and delayed winter grain sowing (down 20%) – but some rains have arrived
Crop damage in Pakistan: implications for next season
Faster/slower economic recovery influencing demand prospects for feed and fuel: tightening maize supplies in the US if demand for ethanol rise faster than predicted
Larger than currently expected import purchases, maize by China for example
Trade measures, in particular further exports restrictions
Developments in outside markets such as currency (US Dollar), equity, energy and other commodity markets

UN Millennium Development Goals Report 2010 / UNICEF Photo

UN Millennium Development Goals Report 2010 / UNICEF Photo

The rhetorical question is asked – “Are we ready?” – and the points supplied are: (1) We are not in a food crisis and grain prices may even come down a bit, (2) But all indications point to still high prices and volatile markets with many uncertainties lying ahead, (3) Food security under growing market instability and price volatility: Are we ready?

The extraordinary joint meeting briefly explained what it meant by “Increased volatility & speculation” with the following points: Markets liberalisation, decline of price supports; Deregulation of the financial service sectorl Declining margins in securities tradingl Rising demand for food in emerging marketsl Under-investment in agriculture; Lack of price transmission to producers; Sudden governmental interventions in export marketl Ease of access to electronic market place; Exchanges restructured today as for-profit corporations.

The dangers, current and expected, are set out in the briefing paper on ‘Agricultural Futures: Strengthening market signals for global price discovery’. This said:

Volatility in commodity foodstuffs is a result of both fundamental factors and speculative inflows of managed money. Sharply differing opinions exist on how institutional money flows have changed the nature of the markets, particularly since the expansion of limits. While financial firms argue that they add volume and liquidity to the market, others maintain that large order size creates volatility and jagged price swings. In the August 2010 price hike of wheat, the CME wheat price moved up limit and down limit within two consecutive days. High frequency trading is also a controversial issue – one that a CFTC editorial recently stated needed “reining in,” commenting that “parasitical trading does not truly contribute to fundamental market functions.”

Global undernourishment (image: Nature)Much debated also is the effect of passive fund money (index funds and swaps dealers), with experts on both sides arguing whether they have caused chronic price elevation and steep contango in some futures contracts. In its 2009 Trade and Development Report, UNCTAD contends that the massive inflow of fund money has caused commodity futures markets to fail the “efficient market” hypothesis, since the purchase and sale of commodity futures by swap dealers and index funds is entirely unrelated to market supply and demand fundamentals, but depends rather on the funds’ ability to attract subscribers. Despite the risk transfer nature of futures trading, in which gains and losses are equally offset, passive funds have successfully packaged and sold futures contracts as an alternative investment class to institutional investors. However, most would agree that these passive funds do not affect volatility levels since their only trading activity is a forward “roll” of their positions and the timings of these rolls are announced in their prospectus.

This is worrying because the FAO is now being a great deal clearer about the same problem it tried to describe in 2007-08,

Finally, Olivier de Schutter, the United Nations Special Rapporteur on the Right To Food, has released a briefing paper entitled ‘Food Commodities Speculation and Food Price Crises: Regulation to reduce the risks of price volatility’. His recommendations:

1. Given the numerous linkages between agriculture, oil, and other financial markets demonstrated above, comprehensive reform of all derivatives trading is necessary. The very first step would be to require registration, as well as clearing to the maximum extent possible of OTC derivatives, so that there is real time reporting of all transactions made, without information privileges for OTC traders, and in order to allow for effective supervision. The small minority of derivatives that cannot be cleared must nevertheless be reported without a time lag.

Islamabad Water Carrier

Islamabad Water Carrier: World Water Day was just another Monday for Nasir Ali, who was photographed on March 22 hauling water to his home in an Islamabad slum. Water shortages have become common for many people in the capital who must gather their daily water from government tankers or private trucks—when the precious resource is available at all. The nation’s acute rainfall shortage has also cut water supplies at hydroelectric dams, exacerbating disruptive power shortages and forcing officials to implement some rather dramatic solutions. Photograph by Aamir Qureshi, AFP/Getty Images

2. Regulatory bodies should carefully study and acquire expertise in commodity markets, instead of regulating commodity derivatives and financial derivatives as if they were the same class of assets. It may be appropriate to assign the task of regulating commodity derivatives to a specific institution staffed with experts in commodity regulation, rather than have a single body regulating both financial and commodity derivatives.

3. Access to commodities futures markets should be restricted as far as possible to qualified and knowledgeable investors and traders who are genuinely concerned about the underlying agricultural commodities. A significant contributory cause of the price spike was speculation by institutional investors who did not have any expertise or interest in agricultural commodities, and who invested in commodities index funds because other financial markets had dried up, or in order to hedge speculative bets made on those markets.

4. Spot markets should be strengthened in order to reduce the uncertainty about future prices that creates the need for speculation. However, these markets must also be regulated in order to prevent hoarding. Spot markets must be transparent, and holdings should be subject to strict limits in order to prevent market manipulation.

5. Physical grain reserves should be established for the purpose of countering extreme fluctuations in food price, managing risk in agricultural derivatives contracts, and discouraging excess speculation, as well as meeting emergency needs. Such measures and the abovementioned reform of commodity derivatives markets should be seen as complementary.