China Importing U.S. Food Inflation - courtesy of the national inflation association (NIA)
With the mainstream media once again being distracted by the debt crisis in Europe, a much larger crisis has been breaking out in China. China has been hit hard in recent weeks with massive food inflation. Food prices in China have risen by 10% during the past month, including a 20% rise in fruits and vegetables. McDonald's recently announced that they will be rising prices for products in all of their stores in China, including a $0.15 increase for Chicken McNuggets. Kweichow Moutai Co., China’s largest liquor maker, is expected to raise prices on their products by 24% this month.
In NIA's top 10 predictions for 2010, NIA predicted there would be major food shortages around the world. The China Banking Regulatory Commission is now admitting that there are severe shortages in China of corn, cotton, sugar, and other crops. China is now selling food from its state reserves in an attempt to keep food inflation under control. The Chinese government now fears that if they don't do more to combat food inflation, they will soon experience a massive outbreak of civil unrest across the country. In fact, last week a group of high school students in the Guizhou province started a riot in the school cafeteria over a $0.07 increase in the cost of a school meal; they shattered windows and destroyed tables, countertops, and chairs.
A $0.07 increase in school lunch prices might not seem like a lot to Americans, because Americans only spend about 13% of their annual expenditures on food. If a family of four in the U.S. earns less than $28,665 per year, their children get a free school lunch. If more than 50% of the children in a town qualify for free lunches, everybody gets a free lunch. 31 million American children are now receiving free lunches. Chinese children don't receive any free lunches and most poor families in China spend approximately 50% of their income on food.
So what is China's solution before food riots break out in every school and McDonald's nationwide? We are seeing signs that the Chinese government is going to implement price controls. We are hearing reports that in some Chinese cities, price controls have already been imposed on four main vegetables. NIA fears that China will soon impose price controls on dairy products like milk and eggs, as well as on meat, grain, and cooking oil. China might also impose price controls on energy commodities like oil, diesel, natural gas, and coal.
The inflation that Chinese citizens are currently suffering from is inflation that China is needlessly importing from the U.S. The solution to China's inflationary crisis is simple, they should allow the yuan to appreciate in value. China's currency is currently artificially low because they are keeping it pegged to the U.S. dollar. As the Federal Reserve prints money, China's central bank also prints enough money to keep the yuan's exchange rate with the U.S. dollar stable. This is done entirely to help Chinese export companies, but it is causing Chinese citizens to suffer.
If China allowed the free market to determine the exchange rate of the yuan, not only will their inflation problem be solved, but China will see massive short-term deflation where Chinese citizens see a massive increase in the purchasing power of their currency. When a government implements price controls, it is interfering in the free market and not allowing the free market to function efficiently. Price controls never work because the free market is always stronger than government. Price controls in China will likely lead to empty store shelves and hour long lines at gas stations. Price controls will also likely lead to the creation of a new underground economy in China where Chinese citizens buy and sell food and other goods in the black market, at prices that are determined by the free market.
While NIA has strongly been encouraging Americans to stock up on and store agricultural products, China is making it illegal to hoard food. Garlic prices in China have nearly doubled from one year ago, so China's National Development and Reform Commission (NDRC) decided to fine the Shandong Price Bureau, a local garlic seller, 100,000 yuan or approximately $15,000 for illegally cornering the garlic market to force up the price. The NDRC also fined Jilin Corn Central Wholesale Market Ltd. 1 million yuan or approximately $150,000 for colluding with their competitors to jack up the price of beans.
No individual corporation has the power to drive up agricultural commodity prices substantially on their own. Yet, China's government is blaming speculators for rising food and energy prices, without realizing it is the Chinese government's own manipulation of the yuan that is causing massive food price inflation. When Chinese citizens and businesses hoard commodities, they are not doing it to artificially manipulate commodity prices higher, they are doing it to protect themselves from the government's dangerous and destructive actions.
The same food inflation crisis that China is currently experiencing will likely hit the U.S. in early 2011, only much worse. NIA believes it is only a matter of time before Congress places the blame for rapidly rising U.S. food prices on American "speculators" who are buying agricultural commodity ETFs and "hoarders" who have food storage at home. While China can easily solve their food inflation crisis by allowing the yuan to strengthen, the U.S. will have no way of solving its upcoming food inflation crisis. Despite the U.S. being a major producer of agricultural products and being mostly self-sufficient, oil is a very important commodity used in agriculture production and the U.S. needs to import most of its oil. Oil prices hit a new 52-week high last month of about $88 per barrel.
It is also important to realize that agricultural commodities now trade on the international market. Americans are now competing against the rest of the world for the consumption of food. The U.S. just raised its forecast for fiscal year 2011 agricultural commodity exports to $126.5 billion, up $13.5 billion from its last estimate three months ago. They didn't raise this estimate by 12% because the U.S. is increasing production, they raised it as an admission that high agricultural commodity prices are here to stay.
In recent weeks, the mainstream media in the U.S. has been running nightly reports about large crowds at U.S. shopping malls. The media has been hyping up "Black Friday" and "Cyber Monday" as signs that the U.S. recession is over and U.S. consumers are once again confident and spending money. The truth is, the only reason shopping malls are full is because U.S. retailers have not been passing on their wholesale price increases to consumers.
NIA has been hearing reports from NIA members who own import/export companies and have direct access to sales sheets that show both the wholesale and retail prices of products at some of our nation's largest retailers. All indications are that many of the largest U.S. retailers are seeing as much as a 80% decline in their profit margins on some products, compared to one year ago. Shopping malls may be full, but shareholders of retail stocks may be shocked in early 2011 when retailers miss on their bottom line profit forecasts. With the S&P Retail Index hitting a new 52-week high on Wednesday of 501.17, up 31% since the beginning of July, there is a lot of downside risk in retail stocks at the present time. When stock prices of retailers fall, management will be forced to raise prices in U.S. retail stores.
U.S. 10-year bond yields rose by 17 basis points on Wednesday to 2.97%, a new four-month high. The mainstream media is proclaiming that bond yields are rising due to an ADP Employment Services report out on Wednesday that U.S. businesses added 93,000 jobs in November. We consider these ADP numbers to be meaningless. The Conference Board just reported Wednesday that new online help wanted ads by U.S. businesses in November were 2.575 million, down 2.6% from 2.6425 million in October, indicating that U.S. businesses are looking to hire less people. Interest rates are not rising because the U.S. employment situation is getting better, they are rising because the U.S. bond bubble is getting ready to burst due to massive inflation.
When the bond bubble bursts, not only will China stop increasing their U.S. treasury purchases, but they will likely dump the U.S. treasuries they already own. One of the main reasons China has been so reluctant to dump their U.S. treasuries until now is because there are many asset bubbles forming in China that they want to deflate slowly without causing them to collapse. Real Estate in Beijing is now being priced at 27 times the average worker's income in the city. China has a glut of unused capacity in factories and commercial office buildings. If these factories and office buildings aren't filled now, when times are good, think about what will happen when the U.S. dollar collapses and China is forced to go through a two or three year adjustment period of finding new buyers for the products they produce.
There are many export companies in China that will likely go bankrupt later this decade when Americans can no longer afford to import their products. To avoid this, China has been encouraged to continue rapidly expanding its foreign exchange reserves, which are mostly held in U.S. dollars. NIA believes that China shouldn't be concerned about the short-term, but must focus on the long-term growth of the country. Although in the short-term China might do better by keeping the U.S. dollar propped up for a little while longer, over the long-term the Chinese will be much better off when they no longer need to support our phony standard of living. Chinese government officials need to realize that over a dozen of the largest U.S. railroads went bankrupt in the 1930s, but the U.S. still went through its greatest era of prosperity from 1945-1973, which led to the country becoming the world's superpower.
If China wants to become the world's new superpower, they need to allow Chinese businesses that export to the U.S. to either go bankrupt or find new buyers of their products. Sure, the stock and bond holders will get wiped out, but the infrastructure will still be there. Those who are invested into gold and silver today will have the resources to buy up cheap Chinese assets out of bankruptcy years down the road. Although the first and second tranche investors in China may lose everything, those who buy up these assets out of bankruptcy will be positioned to prosper during what could be a future 25 year boom period for China when their citizens are no longer forced to prop up the U.S. economy
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