I used to think that the fastest way to become worried about markets was
to stare into the bowels of a monoline. No longer. A few days ago, I
happened to hear Goldman Sachs discuss the state of the global financial
system with European clients.
And what struck me most forcefully from this analysis - aside from the
usual, horrific litany of bank woes - was just how much trouble is quietly
brewing in corners of the commodities world.
Never mind that oil prices are high; that problem is already well known
and reams of ink have been spilt debating that, along with the pressures
in metals and mineral spheres.
Instead, what is really catching the attention of Goldman Sachs now is the
outlook for agricultural prices. Or as Jeff Currie, head of commodities
research at the US bank, says with disarming cheer: "We think we could go
into crisis mode in many commodities sectors in the next 12 to 18 months .
. . and I would argue that agriculture is key here."
Now, to some readers of the Financial Times, that observation might seem
odd. After all, inhabitants of the western world typically spend far more
time worrying about the price of petrol for their car, rather than the
price of wheat or corn. And when western investors do think about
"commodity shock", their reference point typically tends to be the 1970s
However, as Mr Currie observes, this is a dangerously blinkered view. Back
in the 1970s, famine touched a much bigger proportion of the world's
population than the energy crisis, he says. And even today, rising food
prices pack a powerful political punch in the developing (or
partly-developed) world, to a degree that is sometimes underappreciated by
the pampered west.
Indeed, there is already ample evidence that political tensions are
building: the World Food Programme, for example, now thinks a third of the
world's population lives in countries with food price controls or export
However, Goldman Sachs thinks this is just part of a much bigger problem
of capital and resource misallocation. After all, Mr Currie argues, if the
world today was a rational economic place, then regions such as the Gulf
which are food-constrained ought to be investing heavily in agriculture.
And since the US is the world's biggest agricultural supplier, this
implies that the Saudi Arabians, say, should be snapping up farms in
Wisconsin - as America secures oil in the most efficient manner by sending
teams of Texans to Riyadh.
But in practice numerous investment controls prevent Saudi Arabians from
buying Wisconsin farms and Americans owning Saudi oil wells. And these
controls are not being dismantled now. On the contrary, mutual mistrust is
now rising. Hence the fact that Gulf leaders are currently considering
desalinating sea water to plant wheat in the desert - while the US and
Europe are trying to turn corn into fuel. Such exercises might make sense
in domestic political terms; but they are apt to be fiendishly expensive.
Thus the upshot of this misallocation, Mr Currie would argue, is even more
inflation - even if the world does experience some form of growth
Now, for any investor who is long on commodities right now (and I would
guess that club includes Goldman Sachs), such trends might seem to smack
of good news. For anybody who is dirt poor in the developing world,
however, the picture is disastrous. A WFP official, for example, recently
showed me the red plastic cup that was used to dole out daily rations to
starving Africans - and then explained, in graphically moving terms, that
this vessel is typically now only being filled by two-thirds each day,
because food prices are rising faster than the WFP budget.
But leaving aside this very real human tragedy, what should also be
crystal clear for investors is that this is not a picture that points to
21st-century capital markets progress; nor is it likely to breed stability
in the medium term. Anyone who thinks this decade's problems start and end
with credit, in other words, may yet receive a rude shock; sadly, we live
in a world where soyabeans may yet pack as painful a punch as subprime.