Saturday, June 7, 2008

Think the Economy Is Bad? Wait Till the States Cut Back

Think the Economy Is Bad? Wait Till the States Cut Back

Struggling as we are with the housing bust, the credit crunch, shrinking consumption, rising unemployment and faltering business investment, we can be forgiven for thinking that all the big shoes have dropped. There is another one up there, however, and it is about to come down.

State and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre-crisis levels even as they warn of numerous cutbacks forced on them by declining tax revenues. The cutbacks, however, are written into budgets for a fiscal year that begins on July 1, a month away. In the meantime the states and cities, often drawing on rainy-day savings, have carried their share of the load for the national economy.

That share is gigantic. At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles. None of that, or very little, has happened so far, not even in California, despite a significant decline in tax revenue.

“We are looking at a $4 billion cut to public schools and deep cuts that will result in thousands of Californians losing their health care,” said Jean Ross, executive director of the California Budget Project, offering a preview of coming hardships. “But the reality is we have not pulled money off the streets yet.”

Quite the opposite, the states and municipalities have increased their spending in recent quarters, bolstering the nation’s meager economic growth. Over the past year, they have added $40 billion to their outlays, even allowing for scattered spending freezes and a few cutbacks in advance of July 1. Total employment has also risen. But when the current fiscal year ends in 30 days (or in the fall for many municipalities), state and city spending will fall, along with employment — slowly at first and then quite noticeably after the next president takes office.

Sometime next year, the decline will reach an annual rate of $50 billion, Goldman Sachs estimates. “It is a big reason to expect a weak economy in 2009,” said Jan Hatzius, chief domestic economist at the firm.

The $90 billion swing — from more spending to less — could be enough to push down a weak economy to zero growth or less, because state and city spending has accounted for as much as half of total economic growth since last fall. (A robust economy has a growth rate of 3 percent to 4 percent, compared with the 0.9 percent or less of the last two quarters.) The $90 billion would certainly offset most of the $107 billion stimulus package now going out from the federal government to millions of Americans in the form of tax rebate checks. The hope is they will spend this windfall on consumption and in doing so sustain the economy. That might happen — for a while. But with the cutbacks in state and city outlays canceling out the consumption, the next president, struggling to revive a weak economy, will almost certainly have to consider a second stimulus package.

But what should it be? Should it be a reprise of the checks, relying again on private-sector spending for rejuvenation? Or should Washington channel extra federal money to city and state governments so they can sustain their outlays for the numerous programs that otherwise would be shrunk? The answer, even on Wall Street, is often: subsidize the states and cities.

“If you want to make sure that federal money gets spent, and jobs are created, you give it to them,” said Nigel Gault, chief domestic economist at Global Insight, a forecasting firm.

Like many others, Mr. Gault contends that more than 50 percent of the $107 billion in stimulus checks now going to households is likely to produce no stimulus at all. Instead, it will be used to pay down debt or buy imported goods and services. Imports bolster production in other countries; not in the United States.

Still, rebate checks have been a standard tool for years in efforts to revive the American economy. So have tax cuts and — the most popular tool of all — the Federal Reserve’s lowering of interest rates. Each tool assumes that people will respond to the incentive with more spending and investment, and markets will then work their magic. Not since the 1970s, when politicians still paid attention to the teachings of John Maynard Keynes, has public spending — government spending — surfaced in mainstream political debate as a potentially effective means of counteracting a downturn.

Government has to step in, Keynesians argue, when private spending is not enough to lift the economy, despite the nudge from tax cuts or lower interest rates or rebate checks. This downturn might be one of those moments, involving as it does the bursting of a huge housing bubble. That has precipitated sharp declines in various tax revenues on which the states and cities depend, forcing them into extraordinary spending cuts — not yet, of course, but after July 1.

The issue barely dents the presidential election campaign. The Republicans in particular are less than enthusiastic about Keynesian economics, with its use of government to rescue markets. They, and many mainstream economists, for that matter, argue that government is inefficient, bureaucratic, wasteful and unable to spend fast enough to counteract a downturn. The two Democratic candidates, in contrast, argue that a second stimulus package, if one is needed, should include federal subsidies to the states and municipalities, not to start new projects but to prevent cutbacks in existing ones.

No state seems more vulnerable than Florida, with its plunging home prices and slashed property-tax assessments, not yet on the books but soon to be. In anticipation, the legislature in May approved a $66.5 billion budget for the coming fiscal year, down from $72 billion in the current one.

Schools are a target, said Michael Sittig, executive director of the Florida League of Cities, “but none has been hurt yet. Nevertheless, everyone is scared. Everyone is in the mode of trying to figure out how to get through next year” — starting 30 days from now.

Despite Interest Rate Cuts, Foreclosures Hit Record High

Despite Interest Rate Cuts, Foreclosures Hit Record High

By Renae Merle

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Even though lower interest rates have made many adjustable-rate mortgages more affordable, foreclosures continue to reach new heights as more than 1 million homeowners face losing their home, according to industry figures released yesterday.

That's because what began as a mortgage crisis focused largely on subprime borrowers has spread and is being fed by the slowing economy it helped create. Borrowers once considered the most creditworthy have been hamstrung by declining home prices, making it difficult to refinance their home to dodge a financial crunch.

About 2.47 percent of home mortgages were in foreclosure during the first quarter of the year, up from 1.28 percent during the comparable period last year and the highest point since the Mortgage Bankers Association began compiling figures in 1979. Another 6.35 percent of home mortgages were delinquent but not yet in foreclosure, up from 4.84 percent last year, the survey found. Taken together, that means that almost 9 percent of mortgages nationally were in trouble, even though sharp Federal Reserve interest rate cuts have cushioned payment increases for some homeowners.

More than 60 percent of the loans entering foreclosure are adjustable-rate mortgages, but the problem does not appear to be the "rate shocks" widely forecast about a year ago. Many of "the loans went bad before any of the resets took place, which is why talking about carving out solutions for just ARM reset problems is misplaced," said Guy Cecala, publisher of Inside Mortgage Finance.

A borrower with a typical-size subprime ARM could expect payments to increase about $70 a month if it reset now, compared with about $450 a month if it had reset in December, according to the American Securitization Forum, a financial industry group.

"So we're not going to see rate shocks causing defaults," said Christopher Mayer, real estate professor at Columbia Business School.

Also, while delinquency rates among subprime borrowers continue to rise, prime borrowers are a growing part of the problem, Mayer said. During the first quarter, the number of prime loans that began foreclosure increased faster than subprime loans, according to the Mortgage Bankers Association.

"The recent increases have been coming from the safer group of borrowers. They are the next shoe to come down," Mayer said.

And although the Fed's interest rate decreases have helped some homeowners with adjustable-rate mortgages, those with artificially low teaser or introductory rates are still experiencing significant increases, said Mark Goldman, a real estate finance lecturer at San Diego State University. "Most of the adjustable-rate loans are resetting to very modest rates, but it can still be a big shock," he said.

Even a slight increase in payments, compounded by rising food and fuel prices, can push homeowners to the financial edge, analysts said. "There is no question: The softening economy, gas prices, all that is just throwing more lighter fluid on an already inflamed situation," Cecala said.

For instance, a growing percentage of troubled borrowers who contact the Consumer Credit Counseling Service of Greater Atlanta have reduced income, having lost overtime pay or a second job, according to data collected by the group. Last year, 22 percent of homeowners listed reduced income as the reason they are in distress. So far this year, it is about 28 percent.

In April, clients spent an average of $335 a month on groceries, up from $291 during the comparable period last year. They spent $242 on gasoline this year, up from $181 in April 2007.

Many clients have adjustable-rate mortgages, but that is not necessarily what caused their problem, said Scott Scredon, a spokesman for the counseling service. "Their rate is going up, plus they lost their job. . . . Then you throw in the rising costs of fuel and food, and it takes away more and more of their disposable income," he said.

The intensity of the foreclosure problem, which is expected to worsen, varies across the country. In the District, 2.39 percent of loans included in the survey were seriously delinquent or in foreclosure in the first quarter, according to the Mortgage Bankers Association. That is up from 1.09 percent during the same period last year. In Maryland, 3.02 percent of mortgages were in trouble, compared with 1.21 percent. And in Virginia, the rate rose to 2.52 percent from 1.99 percent.

The bulk of the problem remains in California and Florida, which reported, respectively, that 9.24 percent and 8.25 percent of subprime ARMs were entering foreclosure, said Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association. "Clearly things in California and Florida are going to get worse before they get better," he said.

Americans $1.7 trillion poorer

Americans $1.7 trillion poorer

Americans' net worth falls for the second straight quarter as home and stock prices decline, but it may not hurt consumer spending, experts say.

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Americans saw their net worth decline by $1.7 trillion in the first quarter - the biggest drop since 2002 - as declines in home values and the stock market ravaged their holdings.

Meanwhile, the amount of equity people have in their homes fell to 46.2%, the lowest level on record.

The net worth of U.S. households fell 3% to $56 trillion at the end of March, according to the Federal Reserve's flow of funds report, which was released Thursday.

The value of real estate assets owned by households and non-profits declined by $305 billion, while financial assets fell by $1.3 trillion, led mainly by a $556 billion drop in stocks and a $400 billion decline in mutual funds.

The first quarter's decline follows a $530 billion drop in wealth in the fourth quarter of 2007. Until then, net worth had been rising steadily since 2003, climbing nearly 31% over those five years. During the bear market of 2000 through 2002, household's net worth dropped 6.2%.

Spending more

The recent declines, however, may not affect consumer spending, said Michael Englund, senior economist with Action Economics. Americans have actually spent more in recent months, particularly at the gas pump as fuel prices soared.

Americans "are spending everything in their wallet and borrowing more," Englund said. "But because the pump takes so much more of their dollars, they are buying fewer T-shirts."

Still, as people feel begin to feel poorer, the growth in consumer spending may slow, said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.

"When wealth goes down, consumers will cut back some," he said. "There will be a drag on spending."

Household debt grew by 3.5% in the first quarter, down from 6.1% in the fourth quarter. The growth of home mortgage debt, including home equity loans, cooled to an annual rate of 3%, less than half the pace of 2007. Consumer credit, which includes credit cards, rose at an annual rate of 5.75%, the same as the 2007 pace.

Thefact that consumers continue to borrow against their homes, even as they decline in value, shows how troubled Americans are.

"It signals how consumers are struggling to get cash," Hoyt said.

The Fed's report comes at a time of growing anxiety about the nation's economic health. Many economists believe the country is already in a recession, if not headed toward one.

In the first four months of the year, employers cut 260,000 jobs, and on Friday the government is expected to report an additional 60,000 losses in May. Gross domestic product rose at a sluggish annual rate of 0.9% in the first three months of the year, when adjusted for inflation.

Whether household wealth will be up or down at the close of 2008 depends more heavily on the stock market's performance than on housing values, since financial assets account for about two-thirds of net worth. Because the stock market has been rising in recent months, Englund is expecting a 6% gain in net worth for the second quarter.

As for the year?

"The jury is really still out," said Englund, adding that wealth could end up flat for 2008.

U.S. Jobs Fall For Fifth Consecutive Month

U.S. Jobs Fall For Fifth Consecutive Month

Melinda Peer

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May's U.S. unemployment rate rose to 5.5%, up from 5.0% in April--the largest month-to-month jump since 1986 and the fifth straight month of job losses, according to the Labor Department's monthly report Friday.

Job losses continued their downward trend in May, with 49,000 jobs cut from payrolls, up from April's revised number of 28,000 job cuts.

The larger than expected jump in unemployment delivered a psychological blow to Wall Street, which has been hungry for signs that the economy is on the road to recovery. The Dow was down by 1.1%, or 140 points, Friday morning. May's job losses were less severe than feared--economists had been expecting job cuts between 60,000 and 70,000--but the unemployment rate was moved up well beyond the consensus forecast for a rate of 5.2%.

The Bureau of Labor Statistics said average hourly earnings rose by 5 cents, or 0.3%, to $17.94, compared with a gain of 2 cents in April and 6 cents in March. Average weekly hours were unchanged, at 33.7 hours in May. The manufacturing workweek was also unchanged, at 41.0 hours, and factory overtime decreased by 0.2 hours, to 3.8 hours.

The number of the unemployed increased by 861,000, to 8.5 million in May, from 6.9 million a year ago, when the jobless rate was 4.5%. "Employment continued to fall in construction, manufacturing, retail trade, and temporary help services, while health care continued to add jobs," the Labor Department said. The slump in jobs will likely put pressure on companies, as consumers, who have been struggling with high food and energy prices, will make additional cutbacks in discretionary spending.

Optimistic data reported throughout the week had some economists hoping that Friday's job figures might bring good news to the beleaguered U.S. economy. (See: "ADP Jobs Report Rosy") On Thursday, the Labor Department said new unemployment benefit applications fell by 18,000, to 375,000 last week--the lowest since mid-April. Additionally, the government's new claims data fell, by 2,750, to 368,500, but the average number of those on unemployment rose to nearly 3.1 million, the highest level since March 2004. The data, combined with promising retail sales reports, pushed the Dow up 214 points--its largest daily point gain since April 18.

Another month of job losses indicates that problems within the housing market and financial sector are spreading throughout the economy, making it harder to gainsay the notion that the United States is suffering a recession. (See: "Are We In A Recession?") The Labor Department estimated that there have been 324,000 job losses since the beginning of the year.

Job Losses and Oil Surge Spread Economic Gloom

Job Losses and Oil Surge Spread Economic Gloom

The unemployment rate surged to 5.5 percent in May from 5 percent — the sharpest monthly spike in 22 years — as the economy lost 49,000 jobs, registering a fifth consecutive month of decline, the Labor Department reported Friday.

The weak jobs report, coupled with a staggering rise in the price of oil — up a record $10.75 a barrel to more than $138 — unleashed a feverish sell-off on Wall Street, sending the Dow Jones industrial average down nearly 400 points. The dollar plunged against several major currencies.

Investors’ recent hopes that the United States might yet skirt a recession sank swiftly in the face of gloomy indications that the economy is gripped by a slowdown and pressured by record fuel prices.

For tens of millions of Americans struggling to pay bills, the jobs report added an official stamp of authority to a dispiriting reality they already know: A deteriorating labor market is eliminating paychecks just as they are needed to compensate for the soaring cost of food and fuel, and as the fall in house prices hacks away at household wealth and access to credit.

“It’s unambiguously ugly,” said Robert Barbera, chief economist at the research and trading firm ITG. “The average American already knows that gas prices are up a ton and it’s really hard to find a job. Sally and Sam on Main Street are already well aware of this, and that’s why sentiment surveys are lower than they were in each of the last two recessions.”

President Bush acknowledged the jump in unemployment as an indication of “slow economic growth,” but he held out hope that $100 billion in tax rebates now being distributed to American households would spur spending and generate jobs.

"We’re beginning to see the signs that the stimulus may be working," Mr. Bush said during a swearing-in ceremony for the housing secretary, Steven C. Preston.

In a presidential election year in which the economy has emerged as a crucial issue, both major candidates used the employment data as an opportunity to criticize their opponent’s governing philosophy.

“The wrong change for our country would be an economic agenda based upon the policies of the past that advocate higher taxes,” said Senator John McCain, Republican of Arizona, in a written statement. “To help families at this critical time, we cannot afford to go backward as Senator Obama advocates."

Senator Barack Obama, Democrat of Illinois, called the labor report “a reminder that working families continue to bear the brunt of the failed Bush economic policies that John McCain wants to continue,” in a statement. “We can’t afford John McCain’s plan to spend billions of dollars on tax breaks for big corporations and wealthy C.E.O.’s.”

Democrats on Capitol Hill and advocates for the unemployed pointed to the spike in joblessness in arguing for the swift extension of federal unemployment insurance.

Among the 8.55 million people who were unemployed in May, 1.55 million had been unemployed for 27 weeks or longer. Unemployment benefits now expire after 26 weeks. An Iraq war financing bill approved by the Senate includes a provision that would extend cash benefits for an additional 13 weeks.

“It would show a new level of callousness by Congress, a new level of disconnect between Washington and the rest of the country, not to pass an extension now,” said Andrew Stettner, executive director of the National Employment Law Project, an advocacy group.

The White House has said it would veto the bill for imposing deadlines on the withdrawal of troops from Iraq. The administration also argues that jobless benefits should not be extended, with the unemployment rate still low by historical measures. Tony Fratto, a White House spokesman, said Friday’s report did not change that position.

The spike in joblessness significantly cooled talk that the Federal Reserve could stop worrying about recession and might soon begin to raise interest rates to choke off rising prices for crucial goods like gasoline and food.

Since last fall, as fears of recession have grown along with the financial turmoil resulting from falling home prices, the Fed has cut interest rates to encourage investment and spur economic activity. A chorus of economists has warned that the Fed has unleashed too much easy money, feeding inflation and driving down the dollar. Some have suggested the Fed might have to reverse course and raise rates. Not anymore, as the labor market continues to offer up evidence of enduring trouble.

“There’s a greater chance of peace breaking out in the Middle East,” said Mr. Barbera, the ITG economist.

The report fleshed out how economic troubles that began with falling home prices have rippled out to other areas of the economy — to shopping malls, grocery stores and home improvement outlets. As merchants cut payrolls in response to declining business, that takes purchasing power out of the economy, reinforcing a downward spiral of retrenchment.

Professional and business services — which include lawyers, accountants, architects and management consultants — led the way down in May, shedding 39,000 jobs, according to the report. Construction declined by 34,000.

Manufacturing lost 26,000 jobs. Retail payrolls shrank by 27,000 and transportation and warehousing by 10,500. Finance and insurance lost 3,700 jobs, amid continuing worries that more red ink lies in wait for banks.

Sallie Mae, the giant provider of student loans, last month shut an office in Mount Laurel, N.J., eliminating jobs for 160 people, the company said. Among those joining the ranks of the unemployed was Brenda Davis, who earned $17 an hour there, and whose husband is disabled, making her the sole breadwinner.

Given that she worked in the collections department, Ms. Davis figures she carries skills that are always in demand, even in a shrinking market.

“As long as people are going to be in debt, there’s going to be a need for collectors,” she said.

But Ms. Davis’s realm of potential jobs has effectively been shrunk by the price of gasoline. She commuted to New Jersey from her home in Philadelphia, a roughly 40-minute drive that took $60 a week in gas and tolls. As she looks for the next job, she must stay closer to home.

“With gasoline being $4 a gallon,” she said, “I want to stay in the city.”

The jobs picture has become particularly punishing for more vulnerable communities, with unemployment among African-Americans leaping to 9.7 percent in May from 8.6 percent in April . Over the same period, joblessness among those ages 16 to 19 climbed to 18.7 percent from 15.4 percent.

Health care remained a bright spot, adding 33,900 jobs in May, while restaurants and bars added 11,400 jobs.

Even those with jobs have been losing ground. Average hourly wages for rank-and-file American workers — roughly 80 percent of the American work force — nudged up to $17.94 in May, an increase of about 3.5 percent compared to a year earlier. But over the same period, rising food and gas prices contributed to inflation of roughly 4 percent, more than canceling out the buying power of the extra wages.

The White House and some economists questioned the validity of the spike in unemployment, noting a surge in people counted as entering the labor force. Some suggested the Labor Department might have botched the statistical adjustments it uses to cancel out seasonal fluctuations in employment, perhaps inflating the effect of graduating college students looking for their first jobs.

“I think this move is exaggerated,” said Michael T. Darda, chief economist at the trading and research firm MKM Partners. New unemployment claims, while recently rising above 370,000 a week, are still not consistent with such a dramatic surge in joblessness, he said.

Others saw the report as catching up with other indicators that have spelled weakness, such as plunging consumer confidence.

The unemployment rate does not count people who have given up looking for work. Over all, the percentage of working age Americans employed dropped to 62.6 percent in May from 63 percent a year earlier.

In recent months, many companies have been cutting working hours for those on their payrolls, eschewing layoffs while hoping the economy improves.

“Companies didn’t have so many people on their payrolls to shrink in the first place,” said Ed McKelvey, an economist at Goldman Sachs, adding that American businesses have been hiring tepidly for years.

In May, those working part time because they could not find full-time work or because of slack business nudged up to 5.23 million, from 5.22 million. But that was a much smaller increase than in the previous month, a possible sign that businesses are running out of hours to cut: next, they may have to resort to layoffs on a larger scale.

“This is what happens when an economy grows solidly below trend for six months,” said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute in Washington. “Employers cut back first on hours, then on jobs.”

Bush Says Signs Show Stimulus Plan Is Working to Boost Economy

Bush Says Signs Show Stimulus Plan Is Working to Boost Economy

By Roger Runningen and Holly Rosenkrantz

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President George W. Bush said the administration is seeing signs that the economic stimulus is beginning to work and urged Congress to make permanent his tax cuts.

‘‘The last thing American need is a tax increase,'' Bush said at a swearing-in ceremony for Steven Preston as Secretary of Housing and Urban Development. Congress must ‘‘send a clear message'' that the tax cuts he advocated become permanent, Bush said.

The U.S. lost jobs for a fifth month, and the unemployment rate rose by the most in more than two decades as an influx of students into the workforce drove the biggest jump in teenage joblessness since at least 1948. The jobless rate increased by half a point to 5.5 percent, higher than every forecast in a Bloomberg News survey.

Preston, a former head of the Small Business Administration, replaces Alphonso Jackson, who resigned amid a federal crime probe into contracts awarded by the agency.

As HUD secretary, Preston will be the president's lead voice on housing issues as policy makers seek ways to stem foreclosures amid the nation's worst housing market since the Great Depression.

Preston, 47, had been head of the Small Business Administration since July 2006. Before that, he was executive vice president of ServiceMaster Co., which offers landscape maintenance, lawn care, pest-control and plumbing, heating and air conditioning services. Preston worked as an investment banker at Lehman Brothers Holdings Inc. earlier in his career.

Consumer anger as oil prices soar

Consumer anger as oil prices soar

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Consumers around the world have been protesting against high oil prices and fuel prices, with US oil topping $139 a barrel after its biggest-ever one-day increase.

The rises came follow a report on Friday by Morgan Stanley, the US financial services firm, that crude could hit $150 a barrel by July 4.

Oil prices were $12 a barrel higher on Friday than in the middle of the week.

Consumers have also been suffering amid rises in food costs, electricity bills and spiralling inflation partly caused by the soaring cost of oil.

Slashed subsidies

The cost of fuel in many countries has risen dramatically after their governments cut subsidies.

India's government, which imports 70 per cent of its oil, cut fuel subsidies earlier in the week, causing an 11 per cent rise in the cost of petrol.

Strikes and protests against the government decision spread across India, paralysing transport in two key states and hitting businesses in Hyderabad and Kolkata on Friday.

Thousands of people demonstrated in Mumbai the previous day, also venting their anger at the cost of gas and food.

Malaysia's government has also slashed fuel subsides, causing prices to nearly double.

After a chaotic rush by drivers to fill up on the last of the subsidised fuel, police in the capital Kuala Lumpur were braced on Friday for a backlash from angry protesters.

In Indonesia, small businessmen are feeling the pinch.

Despite widespread protests, costs have soared by 30 per cent in the last few weeks.

The government scrapped expensive fuel subsidies it said would be better spent on education and development.

The country is also pulling out of Opec, the oil exporters' cartel, because it cannot produce enough oil to export.

In Europe, fishermen, farmers and lorry drivers have held massive protests over the rising prices.

Action in Belgium turned violent when riot police charged fishermen on Wednesday after rocks and firecrackers were hurled across the barricades.

Increasing demand

Since last year, the price of a barrel of oil has nearly doubled in rises attributed to a weakend US dollar and increasing demand - leading to riots, protests and panic-buying in many parts of the world.

Tan Siok Choo, a Malaysia-based business analyst, told Al Jazeera: "Asia's definitely part of the problem, in the sense that extraordinary demand for oil has been brought about because economies like China and India have been doing very well, and that has been translated into exceptionally high car sales."

Some analysts have predicted a drop as a result of steps taken by Asian governments.

John Kilduff at MF Global brokerage firm, said: "Demand is now fully the focus of market participants. The demand stalwart, Asia, is finally buckling, as emerging economies in the region are cutting fuel subsidies."

Airline casualties

High fuel prices have also hit global airlines.

US carrier Continental Airlines announced on Thursday 3,000 job cuts and the halting of service for 67 ageing aircraft because of rising fuel prices.

Two other big carriers, American and United Airlines, have made similar moves.

Some analysts say subsidy cuts in Asia will not be enough to curtail demand.


Harry Tchilinguirian, oil analyst at BNP Paribas, said: "World oil demand growth is still accounted mostly by China, the Middle East and Latin America - and through the summer, there is no reason to expect a material slowdown in demand growth in these areas."

The International Energy Agency warned on Friday that oil demand would rise by 70 per cent if governments continued with their current policies.

World governments must start a $45 trillion "energy technology revolution" or risk a 130 per cent surge in carbon emissions by 2050, the consumer watchdog said.

Choo, of Malaysia's Noordin Sopiee and Associates group, said biofuels and public transport systems are the most viable options for reducing demand.

"But [change] takes active government involvement", she said. "We can't leave it to the private sector."

Oil rises jump more than $10 to new record high

Oil rises jump more than $10 to new record high

By ADAM SCHRECK

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Oil prices shot up more than $11 to a new record above $139 Friday after Morgan Stanley predicted prices would hit $150 by the Fourth of July. The unprecedented jump is all but certain to drive gas prices well past the $4 mark in the coming weeks.

Oil's meteoric surge, which pushed prices more than 8 percent higher in a single day, added to a huge increase Thursday to cap oil's biggest two-day gain in the history of the New York Mercantile Exchange. The burst higher — which also came on rising Middle East tensions — also raised the prospect of accelerating inflation by adding to already strained transportation costs.

That gloomy outlook sent stocks tumbling, taking the Dow Jones industrials down more than 300 points.

Light, sweet crude for July delivery jumped as high as $139.12 on the Nymex, before easing slightly to settle at $138.54, up $10.75. Prices hit a previous record of $135.09 a barrel on May 22, and settled Thursday at $127.79.

Prices pushed sharply higher Friday after Morgan Stanley analyst Ole Slorer predicted strong demand in Asia could drive prices to $150 by Independence Day, when millions of Americans are expected to take to the roads. Slorer said shipments from the Middle East are mimicking patterns seen in the third quarter last year, when Morgan Stanley based an oil price spike prediction on falling supplies in the Atlantic.

"We made the same call using the same parameters, but now we are starting from much lower inventory levels," Slorer said.

Traders also zeroed in on remarks by an Israeli Cabinet minister, who was quoted as saying his country will attack Iran if it doesn't abandon its nuclear program. Transportation Minister Shaul Mofaz added that Iranian President Mahmoud Ahmadinejad "will disappear before Israel does," the Yediot Ahronot daily reported.

Iran is the second-biggest producer in the Organization of Petroleum Exporting Countries, and traders worry that any conflict with Israel could disrupt global supplies.

A further weakening of the dollar also helped send oil prices higher by enticing overseas buyers armed with stronger currencies and others looking for a hedge against the greenback. But it also represented a stampede by bullish traders and optimistic computer models betting that prices still have further to rise.

Friday's surge builds on a $5.49 gain Thursday, which was the biggest single-day price increase in the history of the Nymex crude contract. That spike came as the dollar fell after the European Central Bank suggesting it could raise interest rates.

"With oil pushing back up to the mid-$130s, it's the make it or break it point. If we go past that, we set the course for uncharted waters and head up toward $150," said Stephen Schork, an analyst and trader in Villanova, Pa. "

Meanwhile, U.S. gas prices at the pump continued to hover just shy of an average $4 a gallon, easing only 0.3 cent from Thursday's record.

Drivers are now paying an average of $3.99 for a gallon of regular gas nationwide, according to AAA and the Oil Price Information Service; in many parts of the country, consumers are already paying well over $4. Retail diesel slipped a penny overnight to $4.76.

Pump prices are bound to rise even further if oil sustains its advance. James Cordier, president of Tampa, Fla.-based trading firm Liberty Trading Group, predicted prices could rise to $4.25 as early as the end of the month.

"Unfortunately, drivers cutting back isn't going to lower the price of gasoline any time soon," he said.

The dramatic reversal in what had been a weakening oil market began Thursday after ECB President Jean-Claude Trichet suggested the bank could raise interest rates and the euro climbed against the dollar. When interest rates rise in Europe, or fall in the U.S., the dollar tends to weaken against the euro.

Many traders buy commodities such as oil as a hedge against inflation when the dollar is falling, and a weaker dollar makes oil cheaper for investors dealing in other currencies. Analysts believe the dollar's protracted decline has been a major reason why oil prices have nearly doubled in the past year.

The euro strengthened further against the greenback Friday. A Labor Department report showing the U.S. unemployment rate jumped half a percentage point to 5.5 percent last month — its biggest monthly increase since 1986 — could drag the dollar even lower in the days ahead.

"Unemployment jumping as it did today will be in the market for a long time and will continue to pressure the U.S. dollar," Cordier said.

In other Nymex trading, heating oil futures rose 23.72 cents to $3.918 a gallon while gasoline prices rose 15.7 cents to $3.4915 a gallon. Natural gas futures rose 25 cents to $12.769 per 1,000 cubic feet.

In London, July Brent crude shot up $7.75 to $135.30 a barrel on the ICE Futures exchange.

Largest US unemployment spike in 22 years

Largest US unemployment spike in 22 years

By Andre Damon

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The US economy lost 49,000 net jobs in May and the official unemployment rate shot up by half a percentage point in the sharpest month-to-month increase since 1986, according to figures released Friday by the Labor Department. Oil prices rocketed upwards the same day, posting an increase of more than $10 a barrel.

Financial markets reacted violently to these developments, with both the New York Stock Exchange and NASDAQ plunging immediately after trading opened, each closing down by about 3 percent. The US exchange rate, which had been slightly bolstered by the Federal Reserve’s hints that it might raise interest rates, fell against the euro as the oil price hit a new record.

The steep jump in unemployment — from 5.0 to 5.5 percent — came as a surprise to analysts, who had been predicting an increase rise of only 0.1 percent. May’s net payroll reduction followed a drop of 28,000 jobs in April, and was the fifth consecutive monthly fall. Payrolls have fallen by 324,000 since the year began.

Factory payrolls were reduced by 26,000 last month, after a fall of 49,000 jobs in April,. The overall reduction in manufacturing jobs will be exacerbated by job cuts at General Motors, where most of the 19,000 workers who took a recent buyout package are scheduled to stop working by July 1.

The housing and financial downturns also took a toll on employment figures; housing contraction payrolls fell by 34,000, after a drop of 52,000 in April. The service sector lost 8,000 jobs, and retail dropped by 27,000 jobs, while a further 1,000 jobs were lost in the finance. These figures correlate with the latest consumer confidence numbers, which dropped to their lowest level in 15 years. Consumer spending growth likewise reached its lowest level since the 2001 recession.

There have been similar rises in long-term workforce reduction announcements, with the firm Challenger, Gray & Christmas recently reporting that 100,000 job cuts were announced in May, 17 percent higher than the same month in 2007. A number of major US airlines announced significant cuts this week; most recently Continental Airlines, which said Thursday that it would cut 3,000 jobs, or seven percent of its workforce.

The unexpectedly large rise in the unemployment rate — which depends not only the number of jobless but the number of people actively looking for work — appears to have been affected by the influx of students looking to find summer jobs. Economists interviewed in major newspapers expected that part of the unemployment increase would later be amended, and noted that payroll figures were actually somewhat more favorable than expected.

Nevertheless, the announcement triggered a frenzy on Wall Street, as speculators dumped dollars and bought crude oil futures, driving prices up to $139.12 before the market closed up by $10.75 to $138.54. Other commodities saw smaller jumps, and the euro rose one percent against the dollar, hitting $1.58. Unexpectedly rapid trading forced the New York Mercantile Exchange to temporarily shut down some of its operations.

The steady increase in unemployment and fall in payrolls underscores the possibility of a severe US recession materializing in the coming months — an outcome that certain analysts had of late been discounting — and complicates problems for the Federal Reserve, which this week suggested that it might raise rates to shore up the dollar and limit US exposure to soaring commodities prices.

Wall Street’s frenzied reaction to the news may be attributable to the critical role of consumer spending in propping up the US economy. Since consumers are so heavily in debt and have lost large amounts of equity through the collapse of the housing bubble, any decrease in employment — and hence income — will likely to manifest itself directly in further defaults and foreclosures. These would in turn further destabilize credit markets, restricting lending and leading to more layoffs.

James Knightley, at ING Group, told the Financial Times: “We expect that the labour market will continue to weaken... This is bad news for the household sector, which is already having to cope with negative real wage growth, falling house prices and more expensive borrowing. This will continue to depress consumer spending and will, in our view, help to keep activity depressed for longer than financial markets are currently discounting.”

The Dow Jones Industrial Average suffered its worst sell-off in 15 months, closing down 394 points, or 3.13 percent, while the NASDAQ tumbled 2.96 percent. The S&P Financials Index was especially hard-hit, dropping 5 percent. The index fell to its lowest rate since March, despite the emergency lending and interest rate cuts initiated by the Fed during the past three months. Lehman Brothers, which had been rumored to be on the verge of bankrupcy during the Bear Stearns bailout three months ago and is reportedly particularly exposed to bad mortgage loans, responded to a credit rating downgrade earlier this week by preparing to raise an additional $5 billion of capital.

In tandem with the unemployment statistics, home foreclosures reached record levels in the first quarter. According to a figures released by the Mortgage Bankers Association, 8.82 percent of US home mortgages are either already in foreclosure or close to it. The association reported that 2.47 percent of home mortgages had been foreclosed upon in the first quarter, almost double the rate of 1.28 percent in the first quarter of 2007. The percentage of mortgages in default — i.e., those whose borrowers have fallen behind on their payments, but have not yet been foreclosed — jumped by 4.84 percent to 6.35 percent in the same period. This is despite the fact that the Federal Reserve has cut interest rates by more than half during that time.

As borrowers have increasingly run out of options for refinancing and as home values have continued to plummet, a greater proportion of those who fall behind on payments end up being foreclosed. Moreover, the newest figures indicate that mortgages previously considered to have low default risk are showing increasing rates of foreclosure. Christopher Mayer, a Real Estate professor at Columbia Business school, told the Washington Post: “The recent increases have been coming from the safer group of borrowers. They are the next shoe to come down.”

The world food crisis and the capitalist market

The world food crisis and the capitalist market

By Alex Lantier

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As the June 3-5 Conference on World Food Security of the United Nations’ Food and Agriculture Organization (FAO) began in Rome, FAO Director Jacques Diouf said of the explosion of food prices: “It is touching every country in the world. We have not only seen riots and people dying, but also a government toppled [in Haiti], and we know that many countries...could tilt to one way or the other depending on the discontent or satisfaction of their population.”

With these words, Diouf expressed the growing concern of governments and ruling elites internationally over the potentially revolutionary implications of the upward spiral of prices for basic food staples, which has already sparked a social and economic crisis of global dimensions. In recent months, strikes and demonstrations against rising food prices have occurred in many parts of the world. These initial struggles have exposed the contradiction between the elementary demand of the world’s masses for affordable food and the workings of the capitalist market.

Diouf called for donations of US$30 billion to be invested in world agriculture. Even were this sum to be allocated, it would not begin to address the sources of the current crisis, which lie in economic and political processes of privatization and price speculation that have unfolded over the past three decades and are bound up with the globalization of capitalist agriculture.

With consumers increasingly unable to pay world market prices for food, national governments are compelled to intervene to avert famine and revolt. These interventions, while offering at best partial resolutions to local problems, only increase difficulties elsewhere. Exporting states are limiting their external sales in an attempt to shield their own populations from the worst of the price rises, while extorting higher prices from importing nations by restricting supply.

The most devastating price increases are those for the basic food grains. These are relatively non-perishable and therefore widely traded, and make up a third or more of daily caloric intake, especially in poorer countries. They are also used extensively in other parts of the food chain—e.g., for livestock feed and sweeteners—thus affecting prices for meat, eggs, dairy products and various processed foods.

Wheat prices in the US—the largest exporter and one of the few not imposing export restrictions—remain at historically high levels after an extraordinary spike in February. On April 28, Newsweek wrote of the commonly used hard red spring wheat variety: “For 50 years it traded at around $2 or $3 a bushel on the Minneapolis futures exchange, which specializes in hard red spring wheat. In September, the price was $7. In February, that price peaked for a day at $24, as the market panicked over low supply. ‘It wasn’t clear whether there would be enough to finish out the year,’ says Bill Lapp, an agricultural economist in Omaha. The current price is down again, but only to $11.24.”

Other major exporters are also charging record prices or have ceased exports altogether. Prices at the main European wheat export port of Rouen, near Paris, were €280 per ton in April, up from €100 in 2006. Russia has imposed a 40 percent export tax on wheat, and a large December 2007 Russia wheat sale to Egypt fetched a price of roughly US$11.80 per bushel. Argentina and Kazakhstan have both banned wheat exports. Kazakhstan cited the “need to assure the country’s food security, and not permit negative consequences for the domestic market, in conditions of a significant rise in prices on the world grain market and a shortage of food grain in the world.”

The world rice market has been even further destabilized. In part, this is because it is relatively small—only 7 percent of the global 2006-2007 crop of 420 megatons (Mt) was traded internationally, versus 19 percent of the 592-Mt 2006-2007 crop of wheat—and therefore more vulnerable to supply shocks.

Also, far more of the world’s main rice exporters (Thailand, Vietnam, India, Pakistan, the US, China and Egypt) are poorer countries, where the state fixes low domestic prices for the crop. These countries have imposed export restrictions as well, as rising world prices give rice processors an incentive to export large quantities of rice to higher-priced international markets.

India, Vietnam, China and Egypt all announced rice export bans or restrictions in April. Forbes magazine quoted Vietnamese Industry Minister Nguyen Thanh Bien as saying the measure would “reduce the quantity but increase the value and export revenues, while ensuring food security and serving the state’s interest.” These bans leave Thailand as the largest exporter by far. Thai 100 percent B-grade white rice, the industry benchmark, passed US$1,000 per ton on April 24, up from US$383 per ton in January.

Thai exporters could further raise prices if Iran and Indonesia, traditional rice importers that have until now waited for prices to fall, begin purchasing rice. They told the International Herald Tribune, “If Iran buys rose from Thailand, Thai 100 percent B-grade white rice would hit $1,300 a ton.” These price increases have particularly hurt poorer countries in sub-Saharan Africa, the Middle East and the Americas, which represent about half of world import demand.

Corn prices have also exploded. Prices in the US—which has about 40 percent of world production of roughly 700 Mt, and 60 percent of the world export market—jumped to US$6.61 per bushel on May 6, on supply fears due to rainy weather during the corn-planting season and rapid demand growth from ethanol biofuel plants. This is up from US$1.90 per bushel in 2005.

China, another major producer and traditional exporter, faces high demand for animal feed as well as from ethanol and corn syrup plants. It may end up importing some corn by the end of the year.

In a recent analysis of rising food prices, Joachim von Braun of the International Food Policy Research Institute (IFPRI), calculated average prices for grains since 2000, weighted by volume exported from different exporting ports. He found that the price of most grains remained roughly constant between January 2000 and January 2004, but in the ensuing period until January 2008, increased from roughly US$150 to US$400 per ton (for rice), US$120 to US$410 per ton (wheat), and US$100 to US$200 per ton (corn).

He noted: “In 2007, the international food price index rose by nearly 40 percent, compared with 9 percent the year before, and in the first three months of 2008 prices increased further, by about 50 percent.”

Political developments indicate the bitter struggle for advantage occurring between different national bourgeoisies, under conditions where the global economy has been destabilized by rising oil prices and financial turmoil in the wake of the US mortgage crisis.

On May 8, the Financial Times reported that China, Saudi Arabia and Libya were in talks with agricultural countries in Africa, South America and eastern Europe to buy tracts of agricultural land on which they could grow food to guarantee their “food security.”

On May 2, Thai Prime Minister Samak Sundaravej proposed that Thailand, Vietnam, Burma, Laos and Cambodia form a rice cartel, along the lines of the oil cartel OPEC, to charge higher prices for rice on world markets. Thai government spokesman Vichienchot Sukchokrat explained, “Though we are the food center of the world, we have little influence on the price. With the oil price rising so much, we import expensive oil but sell rice very cheaply, and that’s unfair to us and hurts our trade balance.” However, international criticism ultimately forced the Thai government to abandon the idea, despite support from the Laotian government.

Smuggling and hoarding are surging in producing countries, as owners of grain try to export it to take advantage of higher prices on international markets. Forbes published a May 1 piece entitled “A Black Market Grows in Rice,” describing smuggling’s lucrative investment potential.

It advised: “The biggest opportunities may be in China, the world’s largest rice producer, where grain prices are among the lowest in the world.... Reports of rice smuggling have surfaced this week in areas all along China’s sprawling borders, from Yunnan province next to Vietnam, to northwest Xinjiang, which borders the central Asian states of Kazakhstan and Kyrgyzstan, all the way to Guangdong, a prosperous southern Chinese province that sources 60 percent of its rice from elsewhere in the country.”

Though not yet consciously unified, the response of the international working class has shown the world scale and objectively integral character of its struggles and demands. Strikes and protests have spanned the globe.

South Korean media reported a rare street protest in North Korea in March 2008 against a 60 percent reduction in state-distributed rations and the execution of three North Koreans who illegally crossed the border into China to search for food. In China, there have been reports of strikes against factory owners increasing food prices at company stores. Food inflation in the country has reached 21 percent so far in 2008, according to China’s National Bureau of Statistics. Rice prices are reported to be fairly stable due to state subsidies, but prices for pork, cooking oil and vegetables rose 55, 34 and 30 percent, respectively, in 2007.

May Day saw large-scale anti-inflation demonstrations by workers across Southeast Asia. Thousands marched on the Malacanang presidential palace in Manila in the Philippines, the world’s largest rice importer, where rice prices have doubled in recent months. Fifteen thousand workers marched in Jakarta, Indonesia, amid sharp increases in rice, oil and soy products. In Thailand, 2,000 workers demonstrated outside government buildings in Bangkok, with posters declaring: “Expensive rice prices, cheap labor wages—How can laborers live?”

In the Americas, women in Lima banged pots outside of Peru’s Congress on May Day to demand more government subsidies for eating halls for the poor. On March 13, protestors banged pots outside the Central Reserve Bank of El Salvador to protest rising prices, amid reports that a basic basket of food items now costs $160, versus $128 in 2004. The country’s minimum wage is $162.

Already in February 2007, Mexico City saw a 75,000-strong “tortilla protest” over the price of corn tortillas.

On April 12, the Haitian government fell after 10 days of massive protests against a 40 percent rise in food prices and the doubling of the cost of imported rice. These protests turned into violent confrontations with police forces and UN “peacekeepers” occupying the country, with at least five people killed and several UN troops injured.

In the Middle East, rising food prices have brought a number of long-simmering social and political conflicts into the open. Riots shook southern Yemen in early April, with the government deploying tanks against protestors demanding jobs and pay raises in al-Dalea. Wheat prices in the country had doubled over the last year, and rice and vegetable oil had increased by 20 percent.

Foreign workers in the oil and construction sectors of Saudi Arabia and the UAE launched unprecedented strikes in March 2008 for higher wages, amid rising rent and food costs. More than 600 such workers were arrested and deported from the UAE in early April.

The outbreak of fighting between sectarian factions in Lebanon in early May followed closely on the heels of a general strike called by trade unions over price inflation of food and other goods.

In Egypt, a major wheat importer, a textile workers’ strike over food prices at Mahalla al-Kobra on April 6 turned into a confrontation with police, who forced workers to return to work. Police also arrested activists who had called for a general strike in Cairo, but according to international media, most schools and universities in Cairo were deserted. Workers complained of long lines to obtain state-subsidized bread, under conditions where non-subsidized bread often costs 10 to 12 times as much. Other staples such as rice and cooking oil were reported to have doubled in price.

In South Asia, a general strike against rising food prices hit the Indian metropolis of Calcutta on April 21. On April 12, 10,000 textile workers rioted against high food prices in Fatullah, near Dhaka in Bangladesh, a major rice importer. In Afghanistan, workers blocked the main Jalalabad-Kabul road to demand lower food prices on April 22.

In Europe, rising prices for staples such as pasta, bread and dairy products have fueled strikes this year, including in the Scandinavian healthcare sector and the French retail industry. A May 1 rally in the Russian city of Chelyabinsk attracted 14,000 workers, who chanted, “Salaries must rise higher than prices.”

In sub-Saharan Africa, protests have hit Mozambique, Senegal and the Ivory Coast in recent months. Trade unions in South Africa and Nigeria struck in May against higher food and electricity prices. The most widely publicized protests this year were February’s demonstrations in Cameroon and Burkina Faso, which left 40 and 5 dead, respectively, after confrontations with state security forces.

Part Two

By Alex Lantier
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The central problem underlying the current food crisis is not a physical lack of food, but rather its unaffordability for masses of people due to rapidly increasing prices. Among the immediate factors driving the rapid worsening of the food crisis, a major role is played by the explosion of speculative investment in basic commodities such as oil and grain, itself bound up with the difficulties facing US and world financial markets and the decline in the US dollar. Rampant speculation by hedge funds and other big market players has increased costs, encouraging private firms to further bid up prices in a competitive drive to amass as much profit as possible.

Official statistics disprove the assertion that there is not enough food for everyone. According to 2008 US Department of Agriculture figures, the average per capita consumption is 2,618 calories per day in developing countries and 3,348 in developed countries, compared with a recommended minimum of 2,100 calories. However, profound disparities in access to this food, stemming from poverty and social inequality, condemn many millions to hunger.

Time magazine quoted United Nations World Food Program official Josette Sheeran as saying, “We are seeing food on the shelves but people being unable to afford it.”

Commodity speculation

World market prices for agricultural commodities have surged precisely as big investors have pulled out of traditional investment and credit markets, largely as a result of the bursting of the US housing and credit bubbles in 2007. Speculative capital has gone in search of other profitable investments.

A major avenue for such speculative capital is commodity futures. This essentially involves financial bets that prices of basic goods such as oil, grains and metals will continue to rise. Since these futures are used as benchmarks for actual trading in the physical commodities, their heady rise has helped sharply pull up market prices for the commodities themselves.

Recent congressional testimony by a US hedge fund manager, Michael Masters, sheds an interesting light on commodity futures speculation. He told Congress:

“In the early part of this decade, some institutional investors who suffered as a result of the severe equity bear market of 2000-2002 began to look to the commodity futures market as a potential new ‘asset class’ suitable for institutional investment. While the commodities markets have always had some speculators, never before had major investment institutions seriously considered the commodities futures markets as viable for larger-scale investment programs. Commodities looked attractive because they have historically been ‘uncorrelated,’ meaning they trade inversely to fixed income and equity portfolios [i.e., they do not necessarily fall, and instead tend to rise, when the bond or stock markets decline].”

Masters continued: “Mainline financial industry consultants, who advised large institutions on portfolio allocations, suggested for the first time that investors could ‘buy and hold’ commodities futures, just like investors previously had done with stocks and bonds.”

A commodity futures contract is an agreement between a buyer and seller to trade a given quantity of the commodity at a specified future time and place. The only negotiated element of the contract is the price at delivery, which varies over time on the market. First developed during the nineteenth century on Chicago grain exchanges, commodity futures were initially designed to allow farmers or other producers to lock in costs, avoiding financial losses from sudden swings in prices for key goods.

There is a long history of futures speculation. An investor correctly guessing that corn prices will rise can enter into a futures contract as a buyer, then pocket the difference between the price agreed on at the earlier date and the higher value of corn on the delivery date. Similarly, an investor believing that corn prices will fall can enter into a futures contract as a seller. This is called selling “short.”

To prevent mass speculation in futures from driving prices, the US Commodity Futures Trading Commission (CFTC) places limits on the amount of futures contracts an individual speculator can hold. However, according to 2007 congressional testimony by CFTC Director of Market Oversight Don Heitman, the CFTC has been making an exception to these regulations for Wall Street banks since at least the early 1990s. Now, hedge funds, pension funds or other major investors simply enter into swap agreements with these Wall Street banks to evade CFTC restrictions.

This speculation has taken on grotesque forms. According to the Chicago Board of Trade, less than 10 percent of their grain futures contracts are held by parties actually intending to trade grain. Big investors routinely seek to profit simply from buying futures contracts and, shortly before the due date of the contracts, exchanging or “rolling” them for futures contracts expiring later. This type of speculation is built on the premise that prices will rise, and gives big investors a powerful financial interest in higher commodity prices.

Funds worth tens or hundreds of billions of dollars each have been generating returns of more than 30 percent, as big investors control and profit from owning claims to ever-larger portions of the world’s food supply. The value of the two largest commodity indexes—the Standard & Poor’s/Goldman Sachs Commodity Index and the Dow Jones-American International Group Index—went from about $20 billion in 2002 to $110 billion in 2006, then to $170 billion in 2007 and $240 billion in March 2008.

As investment in commodity futures took off, the rise in food prices over the years 2000-2006 accelerated sharply. The International Food Policy Research Institute, a Washington, D.C., think tank, writes: “In 2007, the international food price index rose by nearly 40 percent, compared with 9 percent in 2006, and in the first three months of 2008 prices increased further, by about 50 percent.”

Bloomberg News wrote on April 28: “Commodity index funds control a record 4.51 billion bushels of corn, wheat and soybeans through Chicago Board of Trade futures.... Investments in grain and livestock futures have more than doubled to about $65 billion from $25 billion in November, according to consultant AgResource Co. in Chicago. The buying of crop futures alone is about half the combined value of the corn, soybeans and wheat grown in the US, the world’s largest exporter of all three commodities. The US Department of Agriculture valued the 2007 harvest at a record $92.5 billion.”

According to a June 6 report in the New York Times, wealthy investors are pouring billions of dollars into the acquisition of physical property—farmland, fertilizer, grain elevators and shipping equipment. Brad Cole, president of Cole Partners Asset Management, told the Times: “There is considerable interest in what we call ‘owning structure’—like United States farmland, Argentine farmland, English farmland—wherever the profit picture is improving.”

The Times matter-of-factly explained the investors’ strategy of deliberately holding back grain from the market in order to reap higher profits from shortage and famine: “When crop prices are climbing, holding inventory for future sale can yield higher profits than selling to meet current demand, for example. Or if prices diverge in different parts of the world, inventory can be shipped to the more profitable market.”

The Times also quoted a commodities broker, Jeffrey Hainline, who pointed out the dangers of a catastrophic price collapse if speculative investors ultimately decide to pull out their money and sell off the assets they have acquired. Hainline said: “Farmland can be a bubble just like Florida real estate. The cycle of getting in and out would be very volatile and disruptive.” This type of outcome threatens not only farmland, but also the agricultural goods being acquired or traded on the futures markets.

Energy prices and biofuels

Rising energy prices, caused to a significant extent by futures speculation, are massively boosting costs for basic farm inputs. The International Food Policy Research Institute (IFPRI) notes: “Energy prices always affected agricultural prices through inputs, i.e., price of fertilizer, pesticides, irrigation and transport. Now, energy prices also affect agricultural output prices strongly via biofuel-land competition.”

Fertilizer prices have exploded, because the production of nitrogen fertilizers requires large amounts of natural gas, the price of which has been carried upward along with oil prices. According to a University of Illinois study, from 2000 to 2008, Illinois farmers’ fertilizer costs roughly doubled—from approximately $55 to $115 per acre of corn. Rising grain prices also result in rising costs for seed, which has roughly doubled from 2000 to 2008. Together, the two account for approximately two thirds of farmers’ input costs.

Transport cost increases, driven by soaring fuel prices, have particularly affected grains, which make up a large portion of world solid bulk shipping. According to the London-based International Grains Council, average shipping prices for a ton of heavy grains sent from the US Gulf Coast to Europe have gone from $44 to $83 over the last year; for the Gulf Coast to Japan, the jump was $65 to $165.

US support for the development of biofuels, largely driven by agribusiness interests, is further dragging food prices upwards. In a measure ostensibly aimed at reducing US energy imports, the Bush administration has mandated the use of corn-based ethanol as a fuel substitute, subsidizing it at the rate of $0.51/gallon. In 2007, ethanol production consumed 20 percent of the US corn crop—roughly 53 megatons (Mt) of corn, enough to feed 150 million people on a US-style, corn-intensive diet.

Projects to triple US corn-based ethanol production to 35 billion gallons by 2017 would further eat into world food supplies. These projects are going forward despite corn-based ethanol’s at best negligible energy and ecological benefits.

As corn fetches higher prices thanks to ethanol subsidies, and the US corn-growing region expands northward due to global warming, corn is increasingly replacing wheat in US farm planting. According to the Washington Post, US farmers are expected to plant 64 million acres of wheat this year, down from 88 million acres in 1981.

Speaking of the February 2008 wheat price spike, David Brown, chairman of the American Bakers Association’s commodity task force, told the Post: “With low stocks and a weak dollar, things fly off the shelf faster than they used to. There’s just not enough acreage coming back into production to replenish [US] stocks.”

The profit system destabilizes the food supply chain

Amid rapidly increasing inflation, the struggle for profit is disorganizing the entire supply chain, stretching from farm inputs to food sold in grocery stores, as major corporations vie for the lion’s share of the new revenues arising from price inflation.

Fishermen and dairy farmers throughout Europe are currently mounting strikes and protests as rising fuel and input costs lead to massive losses, while the prices paid to them by major food traders stagnate.

Especially for small farmers, the gap between rising seed and fertilizer prices and the market prices for their goods spells financial ruin. In the antiseptic terminology of bourgeois social science, the IFPRI notes that this “hinders production response” to higher prices and increased demand for food. In India, the peasantry has become massively indebted to agribusinesses, and tens of thousands of farmers have committed suicide over the last decade.

With little financial incentive to farm basic grains, farm producers worldwide are collectively planting too little of their harvests. Grain traders must therefore dip into reserve stocks to meet demand.

According to April 2008 figures from the US Department of Agriculture (USDA), from 2004 to 2008, world wheat stocks fell from 151 Mt to 110 Mt; world stocks of coarse grains (corn, oats, rye, barley) fell from 179 Mt to 129 Mt. Rice stocks increased from 74.4 Mt in 2004 to 76.5 Mt in 2005, but since have declined to 75.2 Mt.

The UN Food and Agricultural Organization (FAO) writes: “The ratio of world cereal ending stocks in 2007/08 to the trend of world cereal utilization in the following season is forecast to fall to 18.8 percent, the lowest in 3 decades. In spite of the increase in world cereal production in 2007, supplies are not sufficient to meet demand without a sharp drawdown of stocks.... The ratio for wheat is forecast to fall to 22.9 percent, well under the 34 percent level observed during the first half of the decade. The ratio for coarse grains is put at only 14.5 percent.... The stock-to-use ratio for rice is put at 23.4 percent, also a very low level.”

Large companies controlling key inputs or markets and having wide knowledge of trading conditions are profiting immensely, however.

Key among such companies are big retailers. In a February 2008 conference call with investors, Wal-Mart Chief Financial Officer Tom Schoewe said that Wal-Mart’s record quarterly sales and $4.1 billion profit were partially due to rises in grocery prices, and particularly dairy prices. Schoewe “declined to quantify the impact” of rising food prices, according to Bloomberg News.

France’s Carrefour, the world’s second-largest retailer, announced record first-quarter profits of €1.87 billion. Its CEO, José Luis Durán, told analysts that slumping consumer confidence was starting to hurt non-food sales, but this drop was largely offset by a rise in food sales figures.

Agribusiness firm Monsanto, which provides genetically modified seeds to farmers in the US and internationally, has also sent seen its net profits increase from $255 million to $993 million from 2005 to 2007. Among seed-producing agribusiness firms, Monsanto is often singled out for its acquisition of Delta and Pine Land Company, which created “Terminator seeds” that grow into plants with sterile grains. This could force farmers to rely exclusively on agribusiness companies for seed supplies. Monsanto claims it will not commercialize the product.

Agribusiness giant Archer Daniels Midland (ADM) reported a 42 percent rise in quarterly profits, to $517 million, for the first quarter of 2008. ADM CEO Patricia Woertz commented: “Volatility in commodity markets presented unprecedented opportunities. Once again, our team leveraged our financial flexibility and global asset base to capture those opportunities to deliver shareholder value”—that is to say, to reap massive profits.


Part Three

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The current food crisis reflects not only financial events of recent years, but longer-term policies of world imperialism. Instead of allowing for a planned improvement of infrastructure and farming techniques, globalization on a capitalist basis has resulted in a restriction in many parts of the world of farm production. This has been carried out in order to lessen competition and prevent market gluts from harming the profit interests of the major powers.

One major aspect of imperialist policy was to limit farm production in the so-called "First World" to prevent sudden falls in world prices. In the US, this policy took the form of the federal government's Conservation Reserve Program, first passed as part of the 1985 Food Security Act.

The program allows farmers to apply for payments of $50 per acre of land on which they do not plant crops. A nationwide limit of 180,000 square kilometers (about 10 percent of US arable land) was imposed on the program, later decreased to 130,000 square kilometers in 2007.

Though the bill was presented as a means of limiting soil erosion due to overplanting of ecologically vulnerable land, much of the fallow land registered under the project was not, in fact, vulnerable to erosion, but rather chosen by farmers on the basis of the price of the crops that could be grown on it. This was in line with the law's stated objectives, which were "acreage reduction" and the maintenance of "target prices and price-support loans."

Similar payments to farmers for farmland kept out of cultivation were adopted on a country-by-country basis, after the 1992 reform of Europe's Common Agricultural Policy.

Production collapsed in the former Soviet bloc after the 1991 dissolution of the USSR, as planned Soviet industries were shut down and sold off by the Stalinist rulers and their Western economic advisers. According to UN Food and Agriculture Organization (FAO) statistics, agricultural production in the former USSR fell 38 percent in the first four years after its dissolution and per capita food production fell 40 percent. Today, even after a partial economic recovery starting around 2000, largely fueled by oil and gas sales, total planted area in the former USSR is 12 percent less than in Soviet times.

The collapse of the Soviet agricultural machinery industry and the disappearance of Soviet subsidies tore into the farm sectors of Soviet-aligned states. According to US Department of Agriculture (USDA) figures, Cuban agricultural production fell 54 percent and food consumption fell 36 percent from 1989 to 1994, and North Korean grain production fell 40 percent from 1990 to 1999.

In developing countries, agriculture and infrastructure were devastated by export surges from wealthy countries and the programs of the International Monetary Fund (IMF), which largely dictated state policy in exchange for loans to help with the states' debt. As agriculture was converted away from regulated subsistence farming and toward free-market cash crops produced for export, developing countries were opened up as export destinations and had more export revenue siphoned off to service debts to "First World" banks.

Liberalization of "Third World" markets and their opening to imperialist power exports devastated local farmers, whose products were forced to compete with highly subsidized exports. The US spends approximately $20 billion and the EU €45 billion per year on export subsidies to keep their farm prices low in foreign markets. In Haiti, liberalization of agricultural markets from 1985 to 1999 resulted in a 40 percent fall in domestic rice production, from 163 kilotons to 100 kilotons, while US imports grew from 4 percent to 63 percent of the Haitian rice market.

IMF programs eliminated state regulation of the food supply and provision of subsidies for fertilizer, irrigation and vaccines, which the IMF declared an unacceptable drain on state funds. World production of cash crops such as coffee, tobacco and cocoa soared, but entire populations became more vulnerable to famine. In the 1980s, Africa's per capita grain production fell from 150 to 125 kilograms, while its grain imports went from 3.72 megatons (Mt) in 1974 to 8.47 Mt in 1993.

In Somalia, the IMF-mandated 1981 devaluation of the Somali shilling led to massive price hikes for imported fertilizer and livestock vaccines, and the government progressively slashed subsidies for farmers and nomadic herders. A 1991 collapse in livestock herds due to disease and a resulting fall in farm production were important factors leading to the 1992 famine, which was then used to justify a US invasion of the country.

In Kenya, long a major African food exporter, the IMF-mandated 1996 reform of the National Cereals and Produce Board (NCPB) devastated the economy and transformed Kenya into a net importer of food. Under pressure to function as a commercial, for-profit enterprise, the NCPB charged more for farm inputs and allowed middlemen to take over much of the storage and distribution of the harvest to cut distribution costs. By 2001, farmers were receiving 400 shillings from private traders for a 90-kg bag of rice costing 719 shillings to produce.

In Malawi, IMF-mandated deregulation of the state grain market led to an explosion in the number of private traders. When flooding hit the country's maize crop in 2001, the state, under pressure to raise funds as international donors such as the US and UK refused to give aid, sold off its strategic grain reserve to traders at one third of the world market price. Prices rose through the end of 2001 as traders hoarded the grain, and the country experienced a major famine in 2002.

The poor state of much of "Third World" agricultural infrastructure after decades of such treatment is common knowledge, though rarely discussed in the mass media. In a March 2004 address, FAO Director-General Jacques Diouf noted: "Africa is the only region in the world in which average per-capita food production has been constantly falling for the past 40 years.... There are many causes for this. There is, for example, the insignificant use of modern inputs, with only 22 kg of fertilizer applied to each hectare of arable land, compared to 144 kg in Asia. The level is even lower in sub-Saharan Africa, which uses 10 kg per hectare.

"The selected seeds that spurred the success of the Green Revolution [the increase in crop productivity during the 1960s and 1970s] in Asia and in Latin America are barely used in Africa. There is also a profound shortage of rural roads and storage and processing facilities.

"Another factor strongly influencing [Africa's] poor agricultural performance is water. It only uses 1.6 percent of its available water reserves for irrigation, as compared to 14 percent in Asia. Only 7 percent of Africa's cropland is irrigated against 40 percent in Asia, and if we exclude the five most developed countries in this regard—Morocco, Egypt, Sudan, Madagascar and South Africa—the proportion for the remaining 48 countries drops to 3 percent. Yields from irrigated crops are three times higher than yields from rain-fed crops, but agricultural activity on 93 percent of Africa's arable land is dependent on extremely erratic rainfall, and therefore seriously exposed to the risk of drought. Eighty percent of food emergencies are linked to water, especially water stress."

Nor are infrastructure difficulties limited to Africa. In Asia, the International Rice Research Institute (IRRI) noted reduced research investment, the lack of new irrigation projects, and "inadequate maintenance" of existing irrigation infrastructure as major problems. It added that an "unexploited yield gap of 1-2 tons per hectare currently exists in most farmers' fields in rice-growing areas of Asia," citing lack of proper irrigation and fertilizer, pest and disease control, post-harvest storage and transport facilities.

According to the India Times, spring harvest yields for rice are 3.12 tons per hectare (t/ha) in India, as opposed to 4.17 t/ha on average in Asia and 6.26 t/ha in China. In wheat, India produces 2.6 t/ha, below China's 4.1 t/ha and Europe's 5.0 t/ha. The Times noted that rural development expenditure averaged 14.5 percent in 1986-1990, but after the 1991 liberalization and opening to international capital, this fell to 6 percent. Agricultural productivity growth fell from 2.62 percent to 0.5 percent.

While agriculture in China is more productive than in India, it faces its own challenges. Uncoordinated industrialization has decreased land available for farming from 127.6 to 121.7 million hectares, according to figures from the Ministry of Land and Resources. This is despite the passage of repeated measures by the central government to limit land sales by farmers to local officials aiming to set up factories or businesses on prime farmland. Land near factories, many of which are operated with little regard for environmental standards, is often severely polluted.

As the crisis of world agriculture pushes supply downward, population growth and rising demand for more complex foods in industrializing countries are pushing demand upward. This dichotomy between powerful objective developments in world capitalism gives the crisis a particularly intractable and explosive character.

The increased food demand caused by population growth does not in general pose a major problem. Population growth in this decade (roughly 1.2 percent per year) has been less than growth in the 1960s, which averaged 2 percent per year—a time when, thanks to crop productivity and infrastructure improvements, world grain production per capita rose from 275 to 300 kg.

As a result of lower agricultural and research investment, however, crop yield growth has fallen precipitously and is now barely keeping up with population growth. The Washington, D.C.-based International Food Policy Research Institute (IFPRI) comments: "The neglect of agriculture in public investment, research, and service policies over the past decades has undermined its key role for economic growth. As a result, agricultural productivity growth has declined and is too low to meet the present challenges." From 1980 to 2004, it fell from a high of 4.5 percent to 2.0 percent for wheat, 3.3 percent to 1.0 percent for maize, and 3.2 percent to 1.5 percent for rice, according to UN figures.

To the social and industrial problems underlying slow growth of the food supply, one must add rising demand tied to substantial shifts in the global economy—notably the increase in oil revenues in oil-producing countries and industrialization in a number of developing countries, especially in Asia.

Available data does not suggest that major oil producers that are traditional importers of grain (e.g., Saudi Arabia, Nigeria) have contributed to price rises by importing more grain. The tonnage of their rice and wheat imports have, in fact, shrunk in the last few years, according to USDA figures—in part because grain importers refused to buy from high-priced world grain markets as the state fixed low bread prices.

However, these countries' surging oil revenues—oil prices in US dollars have gone up by a factor of more than 6 from 2002 to 2008—have greatly increased market expectations that grain importers will be able to afford to pay large sums for rice, wheat and other foods.

Rising living standards and more meat- and dairy-intensive diets in certain developing countries have increased demand for grain—not only for food, but particularly for feed. According to the International Feed Industry Federation, world use of grain in compound animal feeds passed from 290 Mt in 1975 to 537 Mt in 1994 and 626 Mt in 2005. The FAO forecasts a 60 percent growth in grain use for feed from 1996 to 2030, compared to 45 percent growth in grain use for food.

Compared to 1990 per capita levels, China in 2005 consumed 2.4 times as much meat, 3.0 times as much milk and 2.3 times as much fish. India consumed 1.2 times as much per capita in all categories in 2005 as in 1990. Brazil consumed 1.7 times more meat, 1.2 times as much milk, and 0.9 times as much fish per capita in 2005 as in 1990.

These increases are important in absolute as well as comparative terms. For instance, meat consumption in China in 2007 was 50 kg per person, versus 20 kg in 1980. By comparison, US per capita consumption in 2004 was 98 kg.

The increasingly unstable balance of production and consumption is further threatened by global warming. In a February 2007 article, the Toronto-based Globe and Mail described a Consultative Group on International Agricultural Research (CGIAR) report painting a dire picture of its effect on grain yields.

It wrote: "A rough rule of thumb developed by crop scientists is that, for every 1-degree Celsius increase in temperatures above the mid-30s during key stages in the growing season, such as pollination, yields fall about 10 per cent." It added that, "Average global temperatures will likely rise between 1.1 and 6.4 degrees over the next century, according to the authoritative Intergovernmental Panel on Climate Change, suggesting that, over most of the range of future temperatures, crops will suffer problematic declines."

The CGIAR report described computer models analyzing crop yields in regions—the northern half of the Indian subcontinent, Southeast Asia, and the Sahel (the part of Africa just south of the Sahara desert)—where temperatures often reach 35 degrees Celsius or higher during crop-growing seasons.

The Globe and Mail concluded, "Cereals and corn production in Africa are at risk, as is the rice crop in much of India and Southeast Asia.... The best wheat-growing land in the wide arc of fertile farmland stretching from Pakistan through Northern India and Nepal to Bangladesh would be decimated. Much of the area would become too hot and dry for the crop, placing the food supply of 200 million people at risk."

An advance look at global warming's possible effects is provided in Australia by two straight years of droughts, which the Australian press has widely noted are exacerbated by global warming. Wheat yields have fallen from a normal level of 25 Mt to 10.6 Mt in 2007 and an anticipated yield of 13 Mt in 2008.

Conclusion

The scale of the challenges posed to world agriculture, and the dimensions of the inflationary crisis that has already been unleashed on the world's population despite the plentiful supply of food, underscore the irrationality of world capitalism.

Divided as they are between the competing profit interests of different corporations and states, capitalist policymakers are unable to rationally and coherently plan world economy and agriculture to face these challenges. Instead, they have overseen the destruction or degradation of immense productive resources.

These basic contradictions are now exacerbated and brought to a crisis point by the bursting of the US credit bubble and the rise in oil prices. Despite humanity's elementary need for affordable food, the response of the world bourgeoisie has been to use the price crisis as a source of profits through speculation, smuggling or organizing nationally based price cartels.

The wave of strikes and demonstrations with which the international working class has responded to the explosion of food prices testifies to its objective unity, in opposition to the forces of the world market.

To the perplexity and token measures of capitalist governments and imperialist-dominated agencies such as the UN, the working class must counterpose the revolutionary perspective of international socialism. The social force that is uniquely capable of resolving the crisis on a humane and progressive basis is the international working class, uniting behind it the peasantry and all other oppressed social layers.

The historic task posed to the working class is the reorganization of world economy on an international basis, overcoming the conflict between globalized production and the nation state system, and the replacement of the profit principle by scientifically planned production for the social good, on the basis of public ownership of the means of production under the democratic control of the working population.