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:

http://www.nytimes.com/2011/06/09/world/asia/09gurgaon.html

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.

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.

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.

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.

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.

http://www.reuters.com/article/2011/05/31/us-china-economy-debt-idUSTRE74U26320110531

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.

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.


http://www.ft.com/cms/s/0/d24fa4b6-501e-11e0-9ad1-00144feab49a.html

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.