Why Iran's impending economic crisis could be far worse than anyone has predicted


by FG


Analysts agree that Iran’s economic crisis will accelerate in early summer as the full impact of eliminating subsidies takes effect.  Yet they seem to be missing another potential economic grow that likely to arrive at the same time.   

China--loaded with enough cash to outbid anyone--has been self-sufficient in agriculture until now.  On February 8 the Food and Agricultural Organization warned that drought in China might require the world's largest wheat producer to import vast amounts of the grain, forcing already high market prices to far higher levels never seen before.

We won’t know the extent of the damage to China's winter wheat crop but it could include be virtually ALL China’s production. Extremely low rainfall this winter parched more than 5 million hectares of 14 million hectares planted.  Cross your fingers everyone because the next few weeks' weather will determine if the world faces a real shortage of the staff of life. 

Hoarding on the part of North African countries, starting with Algeria, has already pushed up the wheat price in the Mediterranean to a 20% premium over the price shown on the Chicago futures market.  The immediate risk is that pre-emptive purchases of wheat will price the grain out of the reach of poor Egyptians, not to mention Pakistanis and Bengalis.

And if reserve-rich China, usually self-sufficient, goes into the world market to buy millions of tons of wheat, the price of wheat can rise to an arbitrarily high level.

Prosperity in Asia creates inelastic demand for grain, such that a minor supply disruption such as the 2010 droughts in Argentina and Russia causes huge price increases. American economist Larry Kudlow observes as well that ethanol subsidies artificially inflate grain demand as well, contributing to the present price spike.

As Thomas Friedman wrote in the February 5 New York Times, China and the whole Asian-led developing world's rising consumption of meat, corn, sugar, wheat and oil certainly is fueling the rise in food and gas prices that slammed into the Middle East in the last six months clearly sharpened discontent with the illegitimate regimes - particularly among the young, poor and unemployed.

Much of what I’ve written is borrowed from an article by “Spengler” in the Asia Times though that report speculated mainly on the potential impact on Egypt and the other Arab nations, not Iran.  

What I’ve chosen to add is its potential inflation accelerating impact on Khamenei’s regime.  Having to big against China for food could not come at a worse time.  A hyperinflationary trend stemming from the necessary elimination of subsidies could easily get a massive second-stage boost depending on the dimensions of  China’s agricultural disaster.   In Egypt everyone would love to see Mubarek gone but would it not be better if the crisis occurred while he is still in office.  Otherwise who will be blamed.  Ditto Iran. 

Supposedly there are only five countries in the world that produce a substantial food surplus under normal conditions.

Spengler’s warning fails to include the simultaneous impact of recent bad weather on American and Australian food production.   Both are expected to have substantially lower crop outputs than normal thanks to frosts and floods respectively.  Russia may have a subpar year as well.  

World population may have already passed the tipping point for crises like this.  If so, they will become more common.  By no accident, population growth is greatest in countries like Yemen, Egypt and Bangladesh where women lack educational and economic opportunities outside the home.

For a real scare check out the following report from the NY Times and related photo:




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Response to vilemost

by FG on

I don't think you are intending to suggest the sole cause of this food crisis and rise in prices is a conspiracy of speculators.

First, even if there were such a conspiracy, both the crop failures in China and the crop damage elsewhere are a fact caused by weather which no man can control.   Others facts, not opinions, I stated were overpopulation and the limited number of countries to usually--not this time--produce a substantial surplus.

Secondly, you are putting the cart before the horse and arguing, perhaps unintentionally a half truth.

Certainly speculation can  drive up the price of anything from gold to grain to oil.   But such speculation is usually driven by bad news (i.e., one or more REAL events) which suggest an uncoming shortage of a key commodity.  

Speculators don't necessarily collude.  In fact they compete against each other, investing their cash by betting on a trend based on real facts they've seen.  They have no interest in losing money via a conspiracy with no natural basis.  They see that something appears likely to cause a shortage so they "bet" on prices going up as a result. 

Thus a war in the Middle East or any threat of disruption in oil supplies will always drive up prices for oil.  Speculators, anticipating that, will try to buy oil while it is still cheap, thereby fueling the price increase further.

A year ago it was Russia's grain shortage led to an increase in grain prices for two reasons: 1) the extra demand as Russia spent foreign reserves to purchase grain (increased demand + decrease supply = price increases) and 2) speculators--seeing this coming--tried to buy cheap, thereby adding to demand the drove up prices.

I don't see what you can do about this.  Would you suggest that governments (bureaucrats) be given the power to tell people where they can invest and in which stocks, commodities, etc.   Can't you see where that would produce an even worse fiasco?

Even governments are guilty of "speculating" in the above manner when some real event causes them to see a shortage coming in some vital commodity.  Thus, Algeria sought to buy extra grain, oil or whatever before the impact of Russia's poor crop could become obvious to all.  

Don't individuals do the same thing (hoard) when they expect something to cause shortages (a flood, a drought or--in Iran's case--the elimination of subsidies.   Do you remember how some years ago a rumor got started that there would be a shortage of toilet paper?  Within days you couldn't find any in the supermarkets because panicked citizens ran out to stock up.

The problem is that in most cases, the reasons to suspect a shortage aren't caused by rumors.  The world really is overpopulated, China's winter crop failure actually happened, etc.


The incoming food crisis

by vildemose on

The incoming food crisis and food bubble: