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PBOC announced that it would raise the 1 year lending rate to 6.06% from the previous level of 5.81% and the 1 year deposit rate to 3.0% from 2.75%.
Back in October, PBOC raised rates for the first time in nearly three years as it began doing battle with surging prices, exacerbated by the high growth rate of the domestic economy.
Data supplied by the Chinese Economic Information Bureau shows that inflation has started to rise again following a dip in 2009. Annual averages since 2007 read as: 2007 ~ 4.8%, 2008 ~ 5.9%, 2009 ~ -0.7%, 2010 ~ 3.3%. However in Q4 2010 the average was 4.7%. Clearly the trend is above the official target of 3.0%. The Government has leaned on the PBOC and for 2011 the official target has been adjusted higher to 4.0%. This alteration in inflation policy was announced by the main economic and planning agency, the National development and Reform Commission
Clearly the pace of economic growth is a major factor as Q4 2010 economic expansion was booked at 9.8% following increases in the level of industrial production and retail sales. For all of 2010 the economy grew at a pace of 10.3%, the strongest level in 3 years and compares to 9.25 in 2009.
A Billion plus hungry mouths:
If the workers keep the economy moving, then the workers have to be fed. Food prices around the world have risen substantially this year. Rough rice slipped to $10.485/cwt on June 30th 2010 marking a 25.95% fall from where the year began. Since then it has risen to $16.285/cwt on February 3rd, +55.32%. One has to hope that the Head of the Chinese Statistics Bureau is being completely honest when he says that China has an abundant supply of rice. I say this because with 3 Billion people in the world using rice as their staple food and just 6 to 7% of global rice production trades on the free and open global market. The Dollar Index is inversely correlated to the price of rice to such an extent that R2 is 0.98. As the Fed looks to keep rates low and the ECB is seen as an eager rate riser, so globally one can expect downward pressure on the Dollar and upward pressure on rice. That will in turn place greater strain on the nations that have many hungry mouths to feed. Of course China has a strong $ revenue stream from its exports and foreign exchange reserves have reached $199Bn in Q3 2010. So China should not face any immediate risk of civil unrest. However, if the stockpile ran too low and supplies where hard to come by, one never knows. The smallest spark can light the flame of uprising.
Of course the price of commodities has been incredible with the Reuters-Jefferies CRB Index higher by 35.35% since the low on May 25th 2010. Recently vast tracts of productive land has been out of commission as floods hit farmland Australia, which exports its wheat and sugar cane around the world. There are fears that their priceswill continue to rise. China has not escaped a knock on effect from this as providers to end customers have passed on cost hikes from their own value chain.
In January, wholesale food costs hit the highest monthly figure on record, according to the UN’s Food and Agriculture Organization (FAO). This is a serious issue although the FAO has been quick to argue that this is not the onset of another emergency.
Why are food prices rising?
Following the 2008 peaks there were good harvests for most basic foods and that allowed prices to fall back. At the end of last year severe weather in many of the world’s biggest food exporting countries damaged supplies so pushing food prices almost 20% higher than a year earlier, according to the FAO. Flooding hit the planting season in Canada, and destroyed crops of wheat and sugar cane in Australia. Severe drought and fires ruined wheat harvests in Russia and the surrounding region during the summer, prompting Russia to impose a ban exports.
Consequently wheat production is forecast to be lower this year than in the last two given the data released by the US government.
Not all food prices have risen as countries that are not reliant on supplies from disaster-hit exporters haven’t experienced the same price squeeze. As an example please consider maize in East Africa. Prices have backed off by 50% after outstanding harvests in 2010.
Onion prices have soared in India in the past month, following heavy rains in the west, where the majority of the supply comes from. Regional and national government has come under severe pressure to act, as onions are such an important part of the Indian diet.
OK…now let the politicians and bureaucrats blame the market speculator.
It is a great relief to hear the FAO be partially market savvy when they say that speculators trading commodities on the financial markets are not to blame for the huge rise in prices. It is a shame they had to add to this by saying they have made matters worse. One can sight as many examples as one likes, but it is the market that brings liquidity to the crops. Only through the market can buyers and sellers meet effectively and efficiently. If there is an issue with price movement, surely governments around the world should look to stop blocking the most efficient methods of growing hardy crops that can stand up to weather extremes.
Sugar production has failed to keep up with the growing demand coming from developing countries, pushing prices sharply higher. So there should encouragement to find better methods of crop production. Not a cheap swipe at market trading.
The World Development Movement (WDM) is keen to curb this betting on prices. It is determined to impose greater regulation and restriction on the buying and selling of futures. Big mistake as prices will become artificial and allow inefficient operators to stay in place so short changing the human race in the medium to long term.
Two companies that are set to benefit from this situation are Monsanto Co (US) and Syngenta AG (Switzerland). There are many others that one could select and at Spotlight Ideas a detailed analysis is soon to be released. In the year todate a global index of chemical companies has gained 3.14%. In contrast Syngenta is higher by 12.21% and Monsanto 7.09%. For the American player there has been several items of constructive news as the US has approved the use of GM beet seeds this year. The US Department of Agriculture (USDA), has announced that US sugar supplies could run short this year as farmers could lose 21% of the 2011 crop if they are not able to start sowing in the spring. Farmers have the go ahead to use GM Alfalfa that was developed by Monsanto.
For Syngenta, they too have a slice of the good news it has won approval from the National Biosafety Committee to distribute to farmers in Brazil supplies of “Triple Stack Corn”. This corn is resistant to corn borer, root worm and herbicide infection.
Price wise, Monsanto needs to break over 76.05…on that move the price will book gains to 84 as a short term first objective. Monsanto has a better chart, a classical impulsive rally and once over 310.90 it will rally to 342.72.
Stephen Pope ~ MarketMind
London
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