What is the trigger for a revolution? Sometimes it a brutal act of repression. Sometimes it a lost war, or a natural catastrophe, that exposes the failings of a regime. But more often than not, it is soaring Food Prices. The easiest prediction to make for 2013 is that everything we eat will once again rise sharply in price. So where will the revolutions start this year? Keep an eye on Algeria and Greece — and if you want to feel very nervous, Russia and China. And if you are smart, keep your money out of those countries as well.
The link between the cost of feeding your family and political turmoil is too well-established to be ignored. We saw it most recently with the Arab Spring of 2011. The uprisings that deposed the autocracies of the Middle East had their roots in Food Inflation. Most of the Middle East countries import 50% or more of their Food, making them acutely vulnerable to rising Commodity Prices. In Egypt the Food Inflation rate hit 19% in early 2011. For President Hosni Mubarak that was game over. The regime was finished.
It goes back much further than that, however. Failed harvests in France in 1788 and 1789 meant that the cost of bread soared. From taking 50% of the average working man’s wages it went up to 88%. The result? The French Revolution. The economists Helge Berger and Mark Spoerer have pinned the European revolutions of 1848 on the soaring price of wheat. Likewise, a shortage of food and soaring prices led to strikes in Petrograd in 1917 — and sparked the Russian Revolution.
So there isn’t any question that Food Inflation can create revolts:
There are other factors at play as well, of course. The Swiss don’t take to the barricades when the price of fondue goes through the roof. It usually takes a repressive regime, a rising middle class, a lot of unemployment and an aging leader who has gotten out of touch to complete the picture. But soaring Food Prices are often the spark: once that is lit, the flames take hold.
Nor can it be disputed that food is rising in price right now. The U.S. is set to have a poor harvest this year because of a widespread drought. So will Russia and the Ukraine, both massive wheat producers. Europe, not a particularly major agricultural power, had the opposite problem. Too much rain, even by drizzly British standards, has wreaked havoc on basic crops such as potatoes. The price of chips is now going through the roof right across Europe.
In France, for example, potato prices have gone from $40 a ton to $330, an eight-fold increase. Other major food markets are just as bad. Corn and Soybean prices already hit record highs last year, and, even if they have fallen back a little in recent weeks, they could easily start climbing again in the summer. The United Nations food agency has already warned that 2013 is likely to see dangerous rises in food prices.
That comes against the backdrop of an increasing long-term shortage of food. A surge in global population and the increasing wealth of many developing nations — richer people eat more, and they eat more meat as well, which increases demand for animal feed — means the long term trend in food is upwards. Against that backdrop, it doesn’t take much tightening of supply to send prices rocketing.
So if you figure that rising food prices create revolts, and prices will rocket this year, then where might we see political turmoil? It is a question that matters to investors, because a revolution means a collapse in Stock Markets. Just take a look at Egypt in 2011 — the Cairo index plunged from 7,200 to 3,600 as the regime fell. If the revolt is big enough, markets may tumble globally.
Algeria is one obvious candidate. It was the one country that didn’t get caught up in the Arab Spring. But it has many of the same issues as Libya and Egypt. Don’t be surprised to see demonstrations on the streets there. Morocco may well get caught up in the turmoil. And food shortages may spell the end for President Bashar Assad in Syria.
Greece is the second possibility. Unemployment is now at 27%. Many people are on the breadline — and bread is about to get a lot costlier. There are increasing reports of people having to rely on food handout in Athens and other major cities. Taxes are constantly being pushed higher to meet the deficit targets and wages are still being cut and jobs slashed. More expensive food could easily be the spark for an extremist party to seize power and take the country out of the Euro.
More worrying still, Russia. There have already been protests against the autocratic rule of Vladimir Putin. Rising grain prices have toppled Russian leaders in the past — Putin could follow the czars into oblivion. It is the Russian grain harvest that has been especially badly hit, and this is still a country where poverty is widespread. Putin has stayed in power thanks to rising living standards. If they drop, his regime will be under pressure.
Or, most seriously of all, China. It has grown much richer, but there are millions and millions of people who have moved to the new cities — if they start to go hungry that could prompt a wave of rebellions. Cold weather is playing havoc with food supplies there. Usually, it could import more food if it needed it. But this year that won’t be possible — or at least only at a huge cost. Minor revolts in the Middle East don’t have the potential to knock more than local markets. Egypt was the major stock market in the region, and that has already been through a regime change. But a Greek exit from the Euro, or a Russian or Chinese political rebellion, would massively destabilize the global economy — and send equity, bond and currency markets into turmoil.
Whichever nation it is, it looks like FOOD Inflation may be the most likely cause of turmoil in the markets this year.Courtesy: By Matthew Lynn - Marketwatch