[food crisis] price fixing, deregulation and other goodies

Quite frankly, we are in the grip of gonzo-economics right now when speculative funds poured into wheat futures and stockpiling in the U.S. and Europe cause a Japanese butter shortage.

There was always bilateral and multilateral trade and there've been depressions but the rhetoric now is about "global" food prices and "global" downturns - everything global, including good old monopolies, of which more later.

Excellent article over at International Political Will on food prices.

So, for example, just as an interesting thought for you, there are 350 million people in India who are classified as middle class. That’s bigger than America. Their middle class is larger than our entire population,” Bush said.

Not so fast:

According to the McKinsey Global Institute, the number of middle class Indians is only 50 million (defined as having an annual income between $10,000-20,000). It’s difficult to claim that just 50 million Indians are having more impact than 300 million Americans…so Bush went ahead and “fudged” the numbers.

The Minister of State for Commerce Jairam Ramesh said: “Bush has never been known for his knowledge of economics. And he has just proved once again how comprehensively wrong he is. To say that the demand for food in India is causing increase in global good prices is completely wrong.”

More importantly, there is the matter of scale. The average American consumes 1,046 kilograms of grain each year – the average Indian consumes 178 kg. That means in terms of global impact, each American equates to ten Indians.

So here is a blatant example of hypocrisy, of apportioning blame elsewhere and of course - price fixing. If you feel price fixing is a myth, look at one of the areas less on the media's mind just now - the Roche, BASF and Rhône-Poulenc vitamin monopoly:

[T]hese are the same two global giants that masterminded the most rapacious price-fixing cartel in modern business history during the 1990s and got nailed with the largest criminal fines ever levied. Roche paid $954 million and BASF more than $500 million after entering guilty pleas with the US Department of Justice, Canada, Australia and the European Union.

When the cartel was exposed in 1999, Roche, BASF and Rhône-Poulenc (now Aventis) -- which escaped charges because it was the first cartel member to cooperate with the DOJ -- controlled about 75 percent of the $6-billion-a-year global vitamin business. They had used their industry dominance to pressure at least twelve smaller vitamin makers in Europe and Asia into an arrangement that top executives had taken to calling "Vitamins Inc."

But now, three years after the cartel was exposed, instead of having been reined in, Roche, BASF and Aventis/CVC (in November Aventis sold its vitamin business to CVC Capital Partners of London for an undisclosed sum) are close to grabbing a near-monopoly in the global production and distribution of vitamins, having increased their dominance to at least 85 percent of the global market.

Why should this be of concern? Because these vitamins are blended into feed grains for animals and that's global trade. Buy your vitamins from this cartel or be undercut. Business is business.

China itself is in the grip of price fixing:

The government accused Chinese instant noodle makers in August of pushing up food costs by illegally colluding to raise prices by up to 40 percent. It has given no indication whether it has evidence of illegal behavior by other producers.

The price surge, which began in mid-2007, has so far been limited to food and is blamed on shortages of pork and grain. The government raised gasoline and diesel prices in November to curb rising demand, but said that should add only 0.05 percentage points to monthly inflation.

The surge in food prices has been especially painful for China's poor majority, who spend up to half their incomes on food.

In simple terms, the mechanism is - deregulate markets, in move the cartels, monopolies are created and prices fixed - all causing immense instability. Example:

Deregulation in agricultural markets, like economic deregulation in many sectors, reached full tilt in the eighties and nineties. Trade and development economists preached the wonders of open markets, unfettered production, and industrial agriculture. The World Bank and International Monetary Fund conditioned loan policies on the elimination of government intervention in agricultural markets.

Global commodity agreements, price supports, and other mechanisms which helped keep global supplies and prices stable were dismantled. The World Trade Organization's Agreement on Agriculture, together with multi-lateral and bilateral agreements including the North American Free Trade Agreement (NAFTA), slashed agricultural tariffs in the developing world, and opened up markets for a growing global agribusiness industry.

In the U.S., the 1996 Farm Bill eliminated the last vestiges of domestic price supports for most commodities and replaced them with a massive system of subsidies-the only thing left to prop up a farm economy in perpetual crisis. Market liberalization and the dumping of cheap commodities swamped small farmers here and abroad, pricing them out of local markets.

Cheap feed crops fueled industrial livestock production, increasing meat consumption and driving out small producers. The few independent farmers who stayed in farming shifted production to a few commodities including corn and soy that can be stored and shipped to distant markets.

Wonderful idea in an ideal world, deregulation but it cannot work. An analogy is livestock in a corral in a clearing. Stretching the analogy, imagine ravaging wolves in the surrounding forest. The fences are dismantled to allow the livestock to roam free and the result is pretty obvious.

Can we appeal to the wolves to act altruistically? So how can we regulate the wolves? With subsidies? And that's why we're paying more and more and can do absolutely nothing about it.

A previous article on the matter is here.