Food For Thought: Instability and Political Interference

There are instances where markets need the comforting hand of politically justified guidance.  However, such instances are few and far between.  The ongoing efforts of the world’s leading Central Banks as they strive to maintain calm and confidence in short term money markets is perhaps one of those rare instances.

However, market interference is becoming a more regular feature of today’s newsflow.  The EU is reportedly considering pronouncing the European energy industry ‘strategic’.  The French government has finally engineered the merger of Suez and GdF.  Political interference/influence is the modus operandi of the Russian energy industry.  And today we are reminded that it is not only energy that government’s consider to be strategic.  It is also food.

Russia is considering imposing a ban on its wheat exports.  The apparent reasoning is not so much strategic as economic:  the ban is designed to restrict inflationary pressures in Russia’s own food prices.  Russian inflation rose to 8.7% in July from 8.5% in June and was partially driven by higher food prices.

Global cereal markets are under substantial and protracted pressure.  The emerging Chinese and Indian middle classes are fuelling demand for cereals as their aspirations evolve away from traditional rice-based diets.  Poor harvests in Europe, North America and Australia have dented the supply-side of the equation.  The costs of the world’s most basic need is increasing and nobody seems confident those costs will subside any time soon.

Rather than allowing the operation of markets to deal with the supply/demand imbalance, the Russian government is simply shifting its own inflationary pressures abroad and creating artificially low prices for its own consumers.  Short-term political expediency fails to resolve long-term structural issues.

Traders will not want to short wheat and cereal markets will continue to soar as they discount the possibility of delivery defaults and watch the Australian weather with heightening tension.

Not only are the costs of life’s basics increasing, as energy and food prices fuel inflation, but markets are having to discount political interference as a key variable in evaluating value.  The consequences for markets could well be catastrophic.  The fact of the matter is there is an emerging dislocation between operation of free-markets and the reality of political interference.  This dislocation is certain to have one long lasting effect:  instability.