Unintended Consequences

Thailand - Unintended ConsequencesThailand has been a very good vantage point from which to witness the alarming reemergence of global food price inflation. Reasons for the rise in prices range from international flows of capital and printing of money to the pursuit of finite resources by the masses.

Foreign Direct Investment (FDI) – the official title for international flows of capital – has been steadily moving to countries, such as Thailand, that exhibit what we have termed “the elixir of growth” (growing populations, good capital investment and good savings rates). The effects here include one of the top performing global stock markets of 2010, surging urban and farmland property prices as well as a general environment of prosperity. After all, the vast sums of money that are sloshing up on these glorious beaches have to end up in something. Thailand is also benefiting from massive rubber and palm oil cash crops whose value per raw kilo has more than doubled over the past two years. Even tiny property owners can, and do, participate in these markets. Tourism also substantially assists the economy. Taken together, these factors all are contributing to a fine job of papering over some nagging issues.

Questions relating to sovereignty lead these issues:

  • Thailand continues to experience disagreements, and even the discharge of weapons, related to its eastern border with Cambodia.
  • Just six months ago the bloody anti-government “Red Shirt” rebellion was at its height. Dozens were killed and the movement is still holding protests.
  • While in the deep south I was informed that because of my nationality and complexion, it would be physically dangerous to tour certain agricultural districts.

It’s mostly because of a good economic environment that these issues have been generally ignored.

The broad region that Thailand is in can be thought of as the breadbasket to China and India. The bounty is plentiful: vegetables, fruits, grains and meats. As such, the food inflation beginning to roil the planet has not caused quite the same impact here – yet. These people can supplement some of what they need by growing it themselves.

Young Rubber Trees - note the sap collecting tins neat base of tree

Young Rubber Trees - note the sap collecting tins near the base of the tree

Palm Oil Trees

Palm Oil Trees

For comparison, those in the heavily populated developing world that do not have an ability to grow their own food spend roughly 60% of incremental earnings on food. The average westerner spends somewhat less than 10% of disposable income on food. So a good portion of the developing world is very sensitive to food prices. Of concern, the U.N. Food and Agriculture Organization (FAO) just announced that their global food index has breached highs last seen in 2008. It should be of no surprise to learn that with new highs in food prices that the rioting last seen in 2008 has resumed.

So, what might explain this new acceleration in food prices?

The only major global difference between now and a couple of months ago is the Federal Reserve’s – and to a lesser degree, the European Central Bank – accelerated and insane policy of printing incredible amounts of money, otherwise known as “Quantitative Easing.” Just as with FDI, the newly printed money has to land in something. While these two monetary authorities claim that it is for the betterment of societies across the globe, the empirical evidence does not support this in even one instance during the past 2,000 years. Piling on more debt will only serve to stoke inflation. Shockingly, the Federal Reserve Chair recently asserted that he is exactly 100% capable of controlling inflation should it begin to rise too quickly. I suggest that he tell this to those that are losing their lives right now due to food and energy related rioting in the Middle East and South America. Clearly, when loss of life is occurring on two continents, prices are rising far too quickly for populations to incorporate into their budgets.

Another contributor to quickly rising food and energy prices can simplistically be reduced to the idea that cash strapped citizens in the West are avoiding unnecessary purchases such as homes, flat screen TVs, and clothes but sill spending their money on necessities that include food and energy. Add to this an environment where half of the world economically speaking, which consists 2/3 of the population, has emerged from the present depression with a real ability and desire to purchase better food, heat or cool their homes, and have light in the evening and the pressures become rather obvious.

Finally, there is one additional primary* cog, in our view, that is adding to the inflation. This one is a reinforcing loop. Food and energy are often economic substitutes in and of themselves. Here are two examples:

  1. Cotton has roughly doubled in price over the past year because its planting has been sacrificed for that of corn. The corn has become more attractive to plant as it is used as a bio fuel that can be substituted for gasoline. So, with much higher gasoline prices, a lot of farmers have planted more corn than cotton, and this has caused the value of the remaining cotton to rise.
  2. A similar process of cause and effect has been true for Thailand’s rubber and palm oil crops. Synthetic rubber is made from petroleum. Once petroleum prices rise enough then industry begins to seek out the cheaper, but ultimately increasingly valuable, natural rubber. In addition to uses as cooking oil, palm oil is a bio fuel in South Asia – thus a good and ready substitute when traditional fuel prices rise enough. Add to this a shortage in mature acreage due to the recent financial shocks limiting – right up until now – funding for planting additional acreage and a case begins to be laid for outright shortages in both crops.

Selected Commodity Comparison

So, a complex web of substitution is seen in a world where there are just too many people capable of, and actually paying for, finite resources. When easy money printed by various monetary authorities is also sloshing around, the situation becomes dangerously inflationary. As such, the printed money begins to find its way into more stable stores of value. After all, the more money that is printed the more it resembles sand – it is plentiful and of low value. Historically, rapidly printed money will seek out physical land, commodities and precious metals. Thus a lot of the money is already seeking stability in these categories – not to mention certain stock markets – which is how the Federal Reserve is contributing to food riots the world over. It is a terrible unintended consequence of lousy policy.

While countries like Thailand may have somewhat of a cushion due to their production of many of the resources that are becoming dear, it is only a matter of time before they too are affected in some way. The effects may eventually serve to unmask what formerly were considered merely nagging concerns and show them as real destabilizing issues of the day.

* We acknowledge that weather related issues share some of the blame, but they are fairly minor when compared to the other considerations mentioned here.