Rabobank: When The "Food System" Breaks Down, Everything Will Break Down With It
Michael Every of Rabobank
The headlines today will naturally be all about French President Macron winning re-election over Le Pen. There was such a flood of market commentary before the vote underlining that a Le Pen victory would have been a larger shock than Brexit, etc., and EUR was up in early Asian trading despite the fact that nobody actually thought Le Pen would win: either people secretly feared she might, or it’s ‘buy the rumour, buy the fact’.
The rumor was that if Marcon won there would be an EU oil embargo post-election: will this now occur? If so, markets will be roiled. If not, Europe will be roiled. Indeed, even given a further defeat for right-wing populism in Slovenia overnight, the EU remains deeply divided. In the eyes of many in the east, Germany is part of the problem, not part of the solution over Ukraine, as is Austria, which just rejected Ukrainian EU membership. What about France, given Macron’s predilection for failed Russian diplomacy and his constant harping on about European “strategic autonomy”? One wonders what the EU intellectuals who claim the Ukraine war is the fault of the US, and that the best response would be to accept spheres of influence, would say if the US were to agree and walk away from NATO given Europe is in Russia’s sphere, geographically, and that is what France sometimes seems to want geopolitically. China is very big on that too as part of its new Global Peace Initiative.
Yet for now, a Russian commander in Ukraine states the plan is to take the east and south as far as the Russian-speaking breakaway region of Transnistria, implying an attack on Moldova. That’s not possible now. It doesn’t mean it won’t be soon. Indeed, the FT reports three individuals who have spoken to Putin say that he is not interested in a peace deal now, and instead wants a land-grab he can present as a victory. In short, while many in the EU may not be interested in this war, it is interested in them.
Meanwhile, as if that were not enough, things are heating up on other fronts. In Covid-struck Shanghai, there are photos of gates being welded over the entrances of residential buildings, and an allegation from Radio Free Asia that authorities in Hunan are demanding passports be handed over in response to a surge in online searches about emigration.
The lockdown’s impact on the Chinese economy is huge, including on ports. There is going to be another slump in shipments to the US and Europe, which industry experts call “staggering” in scale. That will create bullwhip effects as supply dries up even as demand fall offs (due to high prices), thus keeping prices high rather than allowing them to adjust down. Then there will be a flood of goods when things re-open, creating US logistical logjams and price-gouging all over again. As Fortune puts it: “‘Companies are beginning to panic’: Experts say China’s lockdowns will make inflation and the supply chain nightmare even worse”.
This lockdown will also hit intra-Asia trade heading to the US and Europe. As Freight Waves puts it, “Vietnam, Malaysia, Taiwan, Japan, Korea, Indonesia and Cambodia have factories waiting on crucial raw materials needed to finish goods ranging from apparel and footwear to furniture. This pipeline saw an expansion in the trade as more American importers diversified their manufacturing out of China as a way to work around the China tariffs. But what this pandemic has revealed is even with this “manufacturing diversification,” the dependency on China has never been fully severed.” So, a pan-Asian slowdown; more shortages; and a stronger argument for total supply-chain separation from China rather than just one degree, or to give up and get used to lock-downs.
Friday also saw Indonesia cancel all exports of palm oil from 28 April until further notice. That takes out the world’s largest producer and exporter of this key vegetable oil at the same time as Ukraine’s sunflower oil is also largely off the world market. Naturally, this is going to have a vast knock-on effect across the global agri complex – and we were already seeing rationing in some Western supermarkets. Moreover, this underlines the recent trend of food exporters opting to stop doing so; on top of some countries using food exports as a ‘weapon’; and the US ‘weaponizing’ their currency.
Together, this changes the geo-economic equation for net food importers who had been relying on exporting widgets in the assumption the dollars earned could be exchanged for food: and when that system breaks down, everything breaks down with it; complex global supply chains stop working. Yes, we aren’t there yet, but the progression is similar to that of the French elections: 18%; 34%; 42%, etc.
However, rather than an instant Mad Max-style return to global barter, or a ‘Bretton Woods 3’, we will likely see the US dollar remain the lesser of all other evils for most of the global economy, if not all of it, alongside national-security protectionism and even greater dollar weaponization: with us or against us; in or out of the global network, and end-consumers in the West. Indeed, compared to most Europeans, many Americans are quite capable of thriving in a Mad Max world, and some seem to crave it. The macro reflects the micro.
One way to boost the US dollar and deal with the risks of supply-side inflation becoming entrenched in wages, even if misplaced, is higher US rates, which are coming. Yet that puts ever greater pressure on all kinds of markets.
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