Monday, June 27, 2011

The Continuation of Quantitative Easing

There is quantitative easing and then there is quantitative easing. Confused? So are some market observers.

After Ben Bernanke's speech last week regarding the end of Quantitative Easing 2.0, the FOMC Committee inserted a small caveat that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. The policy is necessary to keep interest rates artificially low. The irony here is that the yields on Treasurys remains very low even without Federal Reserve intervention b/c of widespread, lingering fears about debt bubbles in Europe, political uncertainty in the Middle East, and tightening in China.

The Bottom Line: The Federal Reserve will continue buying Treasuries after the end of QE 2.0 until it decides not to anymore.

Friday, June 24, 2011

Chinese Government Claims It Isn't Speculating on African Farmland

Chinese investment in sub-Saharan Africa has been on a climb for the past few years. The lack of arable land in China is forcing the Chinese government to invest in alternate means of food security. Other investment locales include the Philippines, Cuba, and South America.

China Envoy: Govt Doesn't Advocate Companies Buying Africa Farmland
A top China envoy to Africa said the government doesn't advocate Chinese companies' acquisition of farmland in Africa and hasn't encouraged Chinese farmers to move to the continent.

While China has sought to strengthen ties with Africa in part to feed its need for resources, the comments by Liu Guijin, China's special envoy for African affairs, at a briefing to reporters on China-Africa relations, distance government policy from what the ambassador called a "sensitive" issue of an apparent rising presence of Chinese agricultural interests in developing foreign farmland for domestic food security purposes.

On whether Beijing was behind the migration of Chinese farmers from Hebei province to Africa, Liu acknowledged that some Chinese farmers had moved to some African nations in private capacity, but said the government wasn't helping them.

"The government knows that grabbing farmland is a very sensitive issue...and will not encourage it," he said.

Media reports have suggested that thousands of Hebei farmers have moved to more than a dozen African countries in recent years, setting up farming businesses in places such as Nigeria, Zambia, Sudan and Kenya.

Liu said some private Chinese companies may have their own projects in placing local personnel in Africa to develop agriculture, but Beijing's policy is aimed at sharing agricultural technology with Africa.

China is home to a fifth of the world's population but has only about 7% of global arable land, making food security a top government priority.

Chinese companies have made strides in similar ventures in Latin America and Southeast Asia.

Earlier this month, one of China's largest farming companies, Heilongjiang Beidahuang Nongken Group, signed a joint venture with Argentina's Cresud SA to buy land and farm soybeans.

Cresud is one of Argentina's top farming companies, controlling more than 1 million hectares of farmland.

Heilongjiang Beidahuang's chairman, Sui Fengfu, told Dow Jones Newswires in March that the company planned to buy 200,000 hectares of overseas farmland this year, and that Latin America was a key target.

The company is already farming 2 million hectares outside China.

Heilongjiang Beidahuang is also spending $1.5 billion to lease and develop farms on 300,000 hectares in Argentina's Rio Negro Province.

The company plans to grow wheat, corn, soybeans, fruits, vegetables and wine grapes for export to China over 5-10 years.

However, the Latin American deals are not land acquisition projects and appear to be crafted to avoid a backlash against foreign ownership of farmland in Argentina.

Argentina's President Cristina Fernandez has introduced legislation limiting land purchases by foreign individuals and companies to 1,000 hectares in rural areas.

Chinese companies are also playing an increasingly important role in developing farmland in the Philippines and Cuba, among other countries.

Source: CME News for Tomorrow

The Bottom Line: China's leaders are growing increasingly concerned about food security for its vast population. Foreign ventures in Africa, Latin America, and Southeast Asia have grown to the extent that they are provoking domestic backlash among native constituents.

Wednesday, June 22, 2011

India Will Join China as a Net Corn Importer

India is now following China as a net grain importer. For pundits who question the underlying US trade deficit, agricultural exports continue to compose a core component of international trade.

Corn and corn derived products are used in the manufacture of animal feed products. As populations grow richer in emerging market nations they also develop an appetite for more complex proteins - e.g. meat.

India To Be Net Corn Importer By 2014-15 -US Grain Council CEO
India will join China to become a net corn importer by 2014-15, placing increased pressure on world corn markets, the head of the U.S. Grains Council said.

Speaking at an agriculture investment summit here, Thomas Dorr forecast that India will import as much as 300,000 metric tons of corn in 2014-15, rising to 808,000 tons in 2018-19. In 2009-10 India exported 995,000 tons of corn.

"We believe that in four short years India will turn into a consistent importer," he said.

This shift is expected to come as Chinese demand for corn rockets. Dorr said that despite a push by Beijing to improve domestic production, the Asian giant will increasingly rely on imports to meet rising consumption by its rapidly-expanding livestock industry.

"China's government is now coming to grips with the fact that food security and food self-sufficiency aren't necessarily the same thing," he said.

World corn production is expected to set a new record in the coming 2011-12 season and yet rising demand from emerging countries and ethanol blenders mean global corn ending stocks are expected to fall by 3 million tons, to near-historic lows.

This pressure is only expected to increase in the future. According to the World Bank, developing country populations with incomes of more than $16,000 a year are expected to rise to 2.1 billion by 2030 from 352 million in 2000, driving demand for meat.

Dorr, who is also former under secretary for rural development of the U.S. Department of Agriculture, said producers and investors have a huge opportunity to benefit from such demand growth, but it will require openness to technology, trade and investment.

The use of genetically-modified crops, which is already widespread in the U.S. corn industry but extremely restricted in other parts of the world like the European Union, will also become increasingly important in order to meet growing demand, he said.

"Non-scientific objections [to GM] must be weighed against the moral imperative to feed a world of 9 billion people by 2050," he said.

Source: CME News for Tomorrow

The Bottom Line: Both India and China will continue to experience food volatility as their immense populations grow. A government focus (rightly so) on social order and stability will have the retarding effect of hampering domestic growth in discretionary consumer spending.

McKinsey Health Insurance Report Attracts Controversy

American politicians are finally getting the courage to tackle entitlement spending. For months Congress has been the scene of political theater on par w/the Greek tragedy playing out in Europe.

The latest installment in the political saga comes courtesy of McKinsey, the giant consulting firm that recently published a report that under ObamaCare, 1/3 of all US employers would drop health care coverage. The findings have resulted in a media frenzy by the insurance industry and Congress. Questions over the methodology, sample size, and types of questions are being raised.


The bottom line: Entitlement spending is a vaunted pillar of political spending. But it is coming under increasing attack by budget hawks. A recent survey by McKinsey has thrown more fuel to the fire. For now, there are more questions than answers.

Monday, June 20, 2011

Chinese Food Prices Rise on Flooding

Floods Drive Up Food Prices In China

Flooding across eastern, southern and southwestern China has killed at least 175 people and is causing significant damage to vegetable crops, helping to drive up food prices at a time when the government is already fighting to contain inflation.

The flooding, triggered by heavy rains that started early this month, has caused widespread suffering in more than a dozen provinces and regions, with state media calling it the worst in decades in some areas.

In addition to the 175 known deaths, 86 people are missing and some 1.6 million people have been displaced by the flooding, which has caused more than $5 billion in damage, the Ministry of Civil Affairs said. Official forecasts have predicted further rain in a number of the most-battered provinces.

China goes through regular cycles of drought and flooding, and both have been relatively severe over the past year. The recent drought was called the worst in 50 years in some parts of China, and continues to affect almost five million hectares of farmland nationwide -- including in different areas of some of the same provinces now afflicted by floods.

The flood-related effect on prices for now may be fairly local, but the rising cost of vegetables has already been a leading factor in pushing inflation to near-three-year highs. Food prices in May were up 11.7% from a year earlier, compared with a 5.5% increase in the overall consumer-price index.

The flooding has reduced vegetable output by about 20% from levels a year earlier in the worst-hit places, particularly in the eastern province of Zhejiang, according to state media.

Xinhua news agency cited Jin Changlin, a Zhejiang agricultural official, as saying that vegetable prices are likely to continue to increase or remain high for about two weeks.

More than 432,000 hectares of crops have been destroyed in flood-affected provinces around the country, including 241,600 hectares in Zhejiang -- about an eighth of the province's total.

At one big market in Hangzhou, Zhejiang's capital, prices of fruits, vegetables and grains have risen about 40% on average, according to Xinhua. It didn't provide its basis of comparison. Higher food prices were also reported in Anhui and Jiangxi provinces, although the sizes of the increases were unclear.

In last year's fourth quarter, vegetables and other agricultural products including cotton, wheat and edible oils fueled a sharp surge in inflation, with prices of common produce like garlic and ginger doubling from a year earlier.

Source: CME News for Tomorrow

The Bottom Line: While summer is typically a cyclical low for agricultural futures unforseen events such as calamitous weather can have a disproportionate impact on prices. Global warming is contributing to unpredictable and savage weather as humanity continues to ignore the long term effects of the environment in favor of short term gains.

Taking a Closer Look at Brazilian Growth

Here is another article about Brazil:

"The level of loans overdue by 90 days has risen rapidly in recent months to 6.1 per cent and is expected to reach 8 per cent by the end of December, said Ricardo Loureiro, president of Experian Latin America, the credit rating agency"

Here is the problem I see w/Brazil and many other natural resource exporters. The government is relying on exports (raw materials and agriculture) and credit to grow GDP. But they are neglecting the domestic manufacturing and consumption sectors.

While exports are an old story, credit growth is something new - and it's giving an artificial boost to spending power and making people feel richer - but as many Americans learned this is an illusion. The growth projections are very impressive given the nature of leverage (which is what we are all here to discuss anyway).

But meanwhile the stronger real is making it very hard for Brazilian factories to compete w/foreign imports. We cannot speak about Brazil w/o mentioning China. (America used to be important to Brazil but has lost its place).

It is ironic that Brazil is exporting its resources to China only to have them return in the form of finished goods. Everything from clothes, electronics, tools, and household goods are cheaper to buy than Brazilian produced items. I would not be surprised if Brazilian factories are having financial difficulties. This situation will eventually contribute to what we have in America - cheap imports at the price of lost jobs and bankrupt manufacturers.

The Bottom Line:
For now investors continue to pour money into Brazil b/c there are few alternatives. Growth - both natural resource & credit based - will continue to power the country through the foreseeable future.

Friday, June 17, 2011

Chinese Investment in Argentina Continues to Grow

Chinese investment in Argentina continues unabated. In response to a populist backlash among legislators, Chinese firms are entering joint ventures and other co-operative partnership deals with Argentinian companies.

China Adds Argentina's Farmlands To Its Commodities Shopping List
Chinese investment is flooding into Argentina as the Asian giant expands its global commodity hunt from the raw materials used in industry to the foodstuffs needed to feed its 1.3 billion citizens.

China's investment in Latin America hit $15.6 billion during the 12-month period through the end of May, nearly three times greater than the year-ago period, consulting firm Deloitte said in a report. Of that amount, Brazil received about 60% and Argentina close to 40%.

During the last three years, more than 70% of China's investment in the region went to energy and minerals, but farming is attracting more attention as the country seeks to fill its bowls from foreign fields.

China already buys the bulk of Argentina's soybean exports, its top crop and largest source of export revenue. Soybeans are mainly used as livestock feed in China, where meat consumption is rising along with personal incomes. At the same time, urbanization is shrinking the amount of arable land available in China.

Last week, China's largest farming company, Heilongjiang Beidahuang Nongken Group, inked a joint venture with Argentina's Cresud SA to buy land and farm soybeans.

Cresud is one of Argentina's top agriculture firms with control over more than 1 million hectares (2.47 million acres) of farmland that produce grain, cattle and milk.

Heilongjiang Beidahuang's chairman, Sui Fengfu, told Dow Jones Newswires in March that the company plans to buy 200,000 hectares of overseas farmland this year, and that Latin America is a key target. The company is already farming 2 million hectares of land outside China.

Heilongjiang Beidahuang is also spending $1.5 billion to lease and develop farms on 300,000 hectares in Argentina's Rio Negro Province. Over a five- to 10-year period, the company plans to grow wheat, corn, soybeans, fruits, vegetables and wine grapes for export to China.

The Cresud and Rio Negro deals appear aimed at avoiding a backlash against foreign ownership of farmland in Argentina. President Cristina Fernandez has introduced legislation limiting land purchases by foreign individuals and companies to 1,000 hectares in rural areas.

Heilongjiang Beidahuang's incursion in agriculture comes hot on the heels of heavy Chinese investment in Argentina's oil sector.

In February, Occidental Petroleum Corp. sold its local assets to China Petroleum & Chemical Corp. for $2.5 billion. Last year, China's Cnooc Ltd., in partnership with Argentina's Bridas Corp., agreed to buy a 60% stake in Pan American Energy from BP PLC for $7.1 billion.

China's hunger for raw materials has also led it into mining, with MCC Minera Sierra Grande SA, a unit of state-run China Metallurgical Group, buying the Sierra Grande iron mine in Rio Negro Province in 2006. The mine, which had been shuttered since 1991, made its first shipment of iron-ore concentrate to China in February.

Deloitte predicts that Chinese investment will continue pouring into Latin America, but expects a diversification in the future into other industries such as manufacturing, infrastructure and finance.

Though its growing exponentially, China's investment still makes up a relatively small share of total foreign direct investment flows to the region.

Foreign direct investment in Latin America grew 40% on the year to $113 billion in 2010, and is expected to rise 15% to 20% this year, according to the U.N.'s Economic Commission for Latin America and the Caribbean.

Source: CME News for Tomorrow

The Bottom Line: Chinese investment in Argentinian agriculture remains high but has been adjusted in recent months to account for greater co-operation with domestic firms in order to counter allegations of foreign land grabbing.

Warning Signs Flash in Indian and Brazilian Government Bonds

Months of consistently raising interest rates have pushed the Brazilian and Indian government bond markets into an inverted yield curve. In an inverted yield curve, interest rates on short term government issues move higher than longer term rates and is considered a warning sign of trouble. The most stark example of this can be seen in Greece where yields on the 2 year government bond are now hovering around the 30% mark.

There are differences however. Brazilian and Indian financial authorities have been engaged in an extremely aggressive battle against inflation. Unlike the USA and continental Europe, food and fuel make up a large percentage of the core inflation component. But there is a cost to such policy. Satisfying the legions of poor and hungry comes at the price of reducing discretionary consumer spending and domestic business spending.


The Bottom Line: Aggressive action by Indian and Brazilian authorities to battle inflation have resulted in an inverse yield curve in their bond markets. This may be a warning sign of capital market implosion or more benignly (and likely), that growth may be slowing.

CFTC Delays Dodd Frank Derivatives Ruling

Certain parts of the USA's Dodd Frank law on derivatives and accounting compliance measures for banks were supposed to take place automatically on July 16, 2011. No more.

The CFTC, the regulatory body responsible for trading in US futures and options, has postponed a final ruling until the end of this year (December 31st, 2011). Score another victory for the banks. Banking and financial industry lobbyists had insisted that the definitions of "swaps" and "swap dealers" remained too vague. Particularly, regulators have not even defined which non-bank - insurance companies, broker dealers, and hedge funds are considered systemically risky.


The Bottom Line: Legal rulemaking by US agencies has always taken a long time given the nature of lobbying. Squeezing the equivalent of several years of regulation into a short time period resulted in an extension for more time.

Friday, June 10, 2011

Modern Indian Growth: In Spite of Government - Not Because of Government

Great article from The New York Times. I am not going to quote parts of the article. Instead read it directly:

The bottom line: India is growing quickly but in a very sporadic fashion. The pattern resemble islands of growth instead of a steady advance b/c of the notorious Indian government red tape.

Wednesday, June 8, 2011

Hedge Fund Investments in African Land are Leading to Food Price Volatility - Or Are They?

According to a private think tank, hedge fund involvement in African agriculture is leading to higher food price volatility.

I can understand their line of reasoning. The legal system and what regulatory agencies exist in Africa are notoriously opaque about investment processes to begin with. Many deals have traditionally been bilaterally struck between foreign investors and high ranking government officials on an individual basis. There is a marked danger of a "land grab" by foreign investors accumulating the choicest pieces of the pie.

However, the article goes too far in blaming hedge funds for increasing food risks. Investment in agriculture requires a long term time frame with many plant growing seasons measured in years - if not decades - for crops to become fully mature. There are heavy sunk costs associated w/developing physical infrastructure and transportation networks that require an equally long time horizon. All of this economic activity is largely beneficial for native populations - particularly in employment but also the development of technical expertise.

Then there is also the possibility of nationalization - an African nation can simply renege on the terms of a deal w/foreigners and seize the farms outright. It has happened before w/other industries - namely cocao, rubber, and cattle farms.

There is also another participant in the African land investment arena that is not mentioned in the article - foreign sovereigns. Foreign governments, particularly cash rich but land poor Middle Eastern nations, have been investing heavily in East Africa for almost a decade in an effort to diversify their food stocks. Given the sparse amount of arable land in the desert and a booming demographic it is no surprise that nations such as Saudi Arabia, Kuwait, and the Gulf States have chosen to invest heavily in sub-Saharan Africa.

Talking Points Hedge Fund Africa Land Investments Increasing Food Risks -Think Tank
Increased foreign investment into agriculture land in Africa could lead to greater food price volatility and food insecurity, think tank Oakland Institute said.

The California-based group estimates that in 2009 roughly 60 million hectares of land across the continent were either leased to, or purchased by, foreign entities, many of them asset managers or other speculative-type investment houses.

Oakland Institute executive director Anuradha Mittal said many of the deals are not very transparent, are causing displacement, and mean governments are giving up control of their land.

"It's like the food land bubble," Mittal said. "In the short-run people are displaced. The long-term impact is that resources are being controlled by outside investors because these are long leases."

The think tank focused on cases in Ethiopia, Mali, Sierra Leone, Mozambique, Tanzania and South Sudan.

There has been a lot of research into so-called land grabs in Africa, where the price of land is cheaper compared with the U.S., Europe and South America.

At the beginning of the year the World Bank published a report on the rise in agriculture land purchasing interest, saying large farmland acquisition by big investors does raise concerns about the long-term benefits to local populations.

Food price rises and inflation risks have been cited as contributing to the unrest in Northern Africa and in other parts of the continent, such as Mozambique.

Source: CME News for Tomorrow

The Bottom Line: Western hedge funds are investing heavily in sub-Saharan Africa in the agricultural space. Their contribution has some impact on food price but not as volatile as others may claim.

Tuesday, June 7, 2011

Indian Ministry Continues to Defer Wheat Export Ban

Unlike Russia, India still has not lifted its wheat export ban despite a nearly 2 year period of time having passed. Ministers are understandably concerned about volatile food prices in one of the world's most populous nations. There is less room for error compared to the former CIS states - the population of a single Indian province is more than the combined total of Russia. Except for limited exceptions the ban still stands.

Talking Points India Food Minister Favors More Time To Export Wheat Products
India's food ministry is in favor of giving traders more time for exports of around 500,000 metric tons of wheat products that were left unsold out of 650,000 tons permitted to ship abroad, Food Minister K.V. Thomas said.

India allowed private traders to export wheat products for a limited period in 2009 and the program was extended in phases until March 31, 2011 after the industry failed to meet the target. Roller flour millers have now sought time until March 31, 2012 to ship the entire quantity.

"We won't oppose [giving more time for] wheat product exports because we, in fact, encourage value-addition. So we may agree on wheat product exports, although we may not agree on grain exports," Thomas told Dow Jones Newswires.

A ministerial panel will decide on the issue, he added, but didn't say when the panel will meet.

Traders said a more-than-two-year ban until mid-2009 on wheat product exports resulted in clients shifting to other suppliers.

"India needs to have a long-term policy on wheat product exports and there should be no restriction on either the quantity or the period of exports," said Veena Sharma, secretary of the Roller Flour Mills Federation of India.

She said maintaining a ban on wheat exports will not only help ensure steady local supplies, but also keep down prices that will give an edge to India's exports of value-added wheat products.

Denmark, the Middle East, Indonesia, Sri Lanka, Nepal and the Maldives are the main buyers of Indian wheat products such as semolina and wheat flour that are used to make bread and bakery items.

India is expecting a record wheat output of 84.27 million tons this crop year through June, up from 80.8 million tons last year. Government officials say the final output may exceed the estimate by up to 2.0 million tons.

The country's food stocks swelled to nearly triple its buffer requirement of 59.13 million tons as of May 1, triggering speculation the government may consider limited grain exports to free up storage space.

But, Thomas said his ministry isn't in favor of grain exports as the government intends to enact a law that will widen subsidized grain sales to the poor. Still, India allows limited shipments to honor diplomatic requests from some countries.

India will export 250,000 tons of wheat to Afghanistan, out of which 100,000 tons have already been shipped, he said. It is also likely to ship to Bangladesh 300,000 tons of parboiled rice, approved in August 2010, within a month, he added.

Source: CME News for Tomorrow

The Bottom Line: India continues to behave cautiously in world grain markets despite a seasonal low in wheat approaching. Its large population and low per capita incomes make it vulnerable to supply shocks.

Monday, June 6, 2011

US Financials, Dodd-Frank, and Basel III Leverage Requirements

Basel III added new rules to systemically important financial institutions last year but has particular importance for US based firms.

Basel III has another implication for US banks. Under the Dodd-Frank rules (still to be finalized) all OTC derivatives trading must shift to exchanges by a certain date. The U.S. Commodity Futures Trading Commission (CFTC) deadline for comment was this past Sunday (June 5) w/a final date of (early) July 2011 finalized.

Among lawyers, “Swap execution facility” (SEF) and “major market participants,” terms used in the Dodd-Frank Act, require further clarity from regulators. While financial firms continue to lobby about the definition of major market participants , their CFOs have quietly continued to accrue cash. For all those who follow the US financial sector and wonder why banks have been hoarding cash and underperforming look no further. The answer is margin.

Under the proposed rules, trading will thus become even more expensive for key players in the CDS market - particularly for banks and funds that work in the custom ("bespoke") finance world. While margin has always existed to some extent among financial institutions involved in OTC trading the rules were not transparent and often varied significantly across the board (e.g. AIG, Lehman Bros, Bear Sterns being notable examples of weakly applied internal rules).

The CME (Chicago Mercantile Exchange), one of the largest exchanges in the world, and the OCC (Options Clearing Corporation) have very clear rules on margin. It is after all, how they have managed to survive multiple financial crises for decades.

Earlier this year, market participants won an exception for Dodd Frank compliance rules but those were mostly w/respect to currency and agricultural derivatives hedging by multinational corps ("MNCs"). While they won exceptions in reporting requirements margin still needs to be posted because under the rules of an exchange, the exchange will make whole any counter-party losses. The CDS trade in sovereign, corporate, and junk (high yield or just HY for short) would be similarly affected.

And as readers here know margin is just another word for leverage. There are also major implications among the rules for the Treasury market. The short dollar trade is now popular among conventional wisdom but a sharp change in legal rulemaking could add to a countertrend rally.

The Bottom Line: Banks continue to accrue cash but have been underperforming this year because of regulatory uncertainty about new trading and reporting rules. In the absence of clear channels of communication they have bolstered their balance sheets to look more healthy than ever.

Thursday, June 2, 2011

Another Look at the Chinese Shadow Banking System

Here is a recent article on the Chinese "shadow banking system" and their efforts to move local government debt off balance sheet to the central bank. Please remember that the Chinese banking system and the Chinese government are the same things. Jokes aside about comparisons to the closeness of regulators and bankers in the US system, China continues to retain top level Party officials throughout business structures.

Now the Chinese are making plans to spin off some of this debt (once cleaned up) to private investors. (Hmm, I am reminded of TALF and the TOMO purchasing program of MBS by the Federal Reserve in the USA).

Meanwhile China's influence in the world markets continues to make its inflationary effects known in other shores by raising asset prices across the board. This goes back to the old inflation/deflation debate. If measured by asset prices, the West is experiencing inflation. But measured by credit the West is in deflation. In any credit based, fiat system there are hidden losses still lurking w/in the system. Losses from banking and housing based debt are still on the books. The real economy continues to be a miserable place for business owners and CFOs making hiring and R+D based decisions.

The Bottom Line: China's financial authorities are trying to head off a rise in bad credit among local institutions by soaking up the debt through the central bank. Inflation is real in China and most emerging markets. The existence of speculative bubbles and poorly planned loan issues is marked proof of overheating in capital infrastructure.

Wednesday, June 1, 2011

Emerging Market Inflation Indexed Bonds

This is an older article but one that I believe is highly relevant. Inflation indexed bonds are typically thought of as US government treasury TIPS. But other countries are beginning to follow that trend by issuing their own inflation indexed debt. Specifically, emerging market investors remain eager to retain exposure to the sector but many are beginning to voice fears about inflation. Many emerging markets, such as Indonesia, have lost the old stigma of political instability and now have yields priced at or lower than Western European countries. But these yields are not protected or indexed to inflation. Food and fuel remain the largest and most volatile segments of most EMs' indices. The hawkish stance taken by many EM central bankers is eating into investor returns.

However, clouds loom on the horizon. Not all EM's are the same. The demographic dividends of some nations such as India and China are expiring. Wage inflation, briefly mentioned in other posts here, continues to rise. Turnover rates at Indian and Chinese firms is approaching 50%/year. The cost of training, hiring, and retaining workers is prohibitive - particularly when their clients in Western Europe and North America are largely unsupportive of price hikes. There will come a time when this slope of diminishing returns hits a wall of worry and economic growth cool down (my own belief is within the next 9-16 months). At that point, EM central banks may be forced to take a more dovish stance - including interest rate cuts.

The Bottom Line: EM are beginning to offer inflation indexed bonds to investors worried about rising food and fuel prices eating into their returns. The trick however is to buy at a time when they believe real rates will come down.

Australian Government Bans Mining in Queensland

The risk on trade just got more interesting. Two of the favored sectors - mining and agriculture are now competing for attention from the Australian government. Australian iron, coal, and other mineral exports have been a key source of the country's astounding growth vis a vis its relationship w/a resource hungry China.

Australia's Queensland To Ban Mining On Key Agricultural Land
The government of Australia's coal-rich Queensland state said it will prohibit mining on a vast area it considers the best land for crops, clashing with some in the mining industry who warn the move will deter investment.

Environment and Resource Management Minister Kate Jones released maps covering 4.78 million hectares, including much of southern Queensland, that she said will be granted protection. Mining and other development projects that aren't well advanced in the approvals process will now be subject to the legislation when it is introduced later in the year, she said.

"Through this policy, we are protecting our important food bowls across the state," Jones said in a statement. "New mining projects that will permanently render strategic cropping land unusable in the protection areas will not be able to go ahead."

She said the state government will soon release a draft planning policy to ensure approvals for development include appropriate consideration of agricultural land.

Queensland is the world's largest exporter of seaborne coking coal, with the Bowen Basin region accounting for almost 40% of global output of the raw material in steel production. Australia is expected to produce 163 million metric tons of coking coal and 232 million tons of thermal coal this year, driven by strong economic growth in developing Asian economies which is underpinning demand for steel, according to data released in March by the Australian Bureau of Agriculture and Resource Economics and Sciences.

The Queensland government expects its policy on agricultural land will be replicated in other states.

Neighboring New South Wales to the south last week placed an immediate 60-day moratorium on granting new coal, coal seam gas and petroleum exploration licenses in a move it said was aimed at striking a balance between agriculture, mining and energy. The government said all new drilling and mining applications would now need to include an agriculture impact statement and be opened for public comment.

The Association of Mining and Exploration Companies, an industry body, said the areas defined by the Queensland government for protection are so vast they will impede the mining industry.

"Queensland would be an economic wreck without mining, yet the state government seems determined to ignore the financial impact of ruling out mining across a massive area," said Ross Musgrove, state manager for the association. "This wholesale mining lockout will scare potential investors and raise doubts about the sovereign risk attached to doing business in Queensland."

Amec members include Anglo American PLC, Fortescue Metals Group Ltd. and Teck Resources Ltd.

Source: CME News For Tomorrow

The Bottom Line: Competing pressure to feed mouths and machinery have come to a head in Australia where the local government has banned mining. In the short term, supply constraints may tighten even more.