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Financial Times: The next crisis will be over food
http://www.ft.com/cms/s/0/76e353b2-db68-11dc-9fdd-0000779fd2ac.html?nclick_c
heck=1
By Gillian Tett
Published: February 14 2008 19:06

I used to think that the fastest way to become worried about markets was
to stare into the bowels of a monoline. No longer. A few days ago, I
happened to hear Goldman Sachs discuss the state of the global financial
system with European clients.

And what struck me most forcefully from this analysis - aside from the
usual, horrific litany of bank woes - was just how much trouble is
quietly brewing in corners of the commodities world.

Never mind that oil prices are high; that problem is already well known
and gallons of ink have been spilt debating that, along with the
pressures in metals and mineral spheres.

Instead, what is really catching the attention of Goldman Sachs now is
the outlook for agricultural prices. Or as Jeff Currie, head of
commodities research at the US bank, says with disarming cheer: “We
think we could go into crisis mode in many commodities sectors in the
next 12 to 18 month s... and I would argue that agriculture is key
here.”

Now, to some readers of the Financial Times, that observation might seem
odd. After all, inhabitants of the western world typically spend far
more time worrying about the price of petrol for their car, rather than
the price of wheat or corn. And when western investors do think about
“commodity shock”, their reference point typically tends to be the
1970s
oil crisis.

However, as Mr Currie observes, this is a dangerously blinkered view.
Back in the 1970s, famine touched a much bigger proportion of the
world’s population than the energy crisis, he says. And even today,
rising food prices pack a powerful political punch in the developing (or
partly-developed) world, to a degree that is sometimes underappreciated
by the pampered west.

Indeed, there is already ample evidence that political tensions are
building: the World Food Programme, for example, now thinks a third of
the world’s population lives in countries with food price controls or
export bans.

However, Goldman Sachs thinks this is just part of a much bigger problem
of capital and resource misallocation. After all, Mr Currie argues, if
the world today was a rational economic place, then regions such as the
Gulf which are food-constrained ought to be investing heavily in
agriculture. And since the US is the world’s biggest agricultural
supplier, this implies that the Saudi Arabians, say, should be snapping
up farms in Wisconsin - as America secures oil in the most efficient
manner by sending teams of Texans to Riyadh.

But in practice numerous investment controls prevent Saudi Arabians from
buying Wisconsin farms and Americans owning Saudi oil wells. And these
controls are not being dismantled now. On the contrary, mutual mistrust
is now rising. Hence the fact that Gulf leaders are currently
considering desalinating sea water to plant wheat in the desert - while
the US and Europe are trying to turn corn into fuel.

Such exercises might make sense in domestic political terms; but they
are apt to be fiendishly expensive. Thus the upshot of this
misallocation, Mr Currie would argue, is even more inflation - even if
the world does experience some form of growth slowdown.
Now, for any investor who is long on commodities right now (and I would
guess that club includes Goldman Sachs), such trends might seem to smack
of good news. For anybody who is dirt poor in the developing world,
however, the picture is disastrous.

A WFP official, for example, recently showed me the red plastic cup that
is used to dole out daily rations to starving Africans, and then
explained, in graphically moving terms, that this vessel is typically
now only being filled by two-thirds each day, because food prices are
rising faster than the WFP budget.

But leaving aside this very real human tragedy, what should also be
crystal clear for investors is that this is not a picture that points to
21st-century capital markets progress; nor is it likely to breed
stability in the medium term. Anyone who thinks this decade’s problems
start and end with credit, in other words, may yet receive a rude shock;
sadly, we live in a world where soyabeans may yet pack as painful a
punch as subprime.

Copyright The Financial Times Limited 2008