From Volume 7, Issue 24 of EIR Online, Published June 10, 2008

Global Economic News

Japan's Rice Auction Fails; WTO Rules Challenged

June 2 (EIRNS)—The deadly paradoxes of WTO trade rules have struck again. Japan's Agricultural Ministry went to the world market last week to purchase by auction the remaining 60,000 tons of its international rice import requirement, as demanded by WTO rules. The ministry indicates that its bid failed because the global price of rice was too high. The ministry says Japan must fulfill the WTO requirement, but has not decided whether to place another bid.

Japan is forced to import more than 767,000 tons of rice annually from the United States, Thailand, and other countries, under requirements of the WTO. This was imposed on Japan in exchange for allowing it to have a high rice tariff. By and large, Japanese do not eat this rice. Partly, this is because the rice on the international market is not the same as Japanese rice in terms of taste, consistency, and shape, but mostly because Japan has historically been self-sufficient in rice and strongly protects its rice farmers and rice farming culture.

The rice that Japan must buy on international markets is put into air-conditioned storage. Japan has imported a total of 8.32 million ton of rice under this program over the years. Of this, 2.22 million tons were donated as humanitarian assistance for other countries, while 730,000 tons were used as livestock feed, and 1.3 million tons are still in stock. A small amount was eaten, and the rest is unaccounted for and is probably waste.

Japan is now looking to re-export this rice as humanitarian aid and for commercial sale, in response to the food crisis.

To recap: Japan makes a special, and successful effort to be self-sufficient in rice (although not in other foodstuffs, by far). But it must import almost 800 thousand tons of rice per year to "pay for" this self-sufficiency privilege as a WTO mandate. To re-export this rice to meet the needs of hungry countries, it must still keep its quota of international rice, and thus go out to auction and bid for rice, which drives up the price—for some of the same countries to which it wishes to offer its rice as aid! And driving the price so high that Japan itself cannot afford to buy it!

The daily Asahi Shimbun calls for an end to this farce: "Japan's importation of rice is not in conformity with the international situation. Japan should start full-fledged negotiations with the WTO to change the existing rules."

Goldman Sachs Out To Grab Global Water Supply

June 5 (EIRNS)—The next big target of speculation is the water sector. On June 4, Ambrose Evans Pritchard posted an article in the London Daily Telegraph, on a Goldman Sachs report advising clients to invest in water, because soon there will be extremely high returns, as water supply, due to climate change, is becoming the next "petroleum." Headlined, "Drought to be biggest world risk," Pritchard writes, a "catastrophic water shortage" could prove to be an even bigger threat to mankind this century than soaring food prices and the relentless exhaustion of energy reserves, according to a panel of "global experts at the Goldman Sachs 'Top Five Risks' conference."

The article quotes Nicholas (Lord) Stern, author of the "Government's Stern Review" on the economics of climate change, warning that underground aquifers could run dry at the same time as glaciers melt. Glaciers on the Himalayas are retreating, and, being the places that hold the water back in the rainy season, this would mean an extreme risk with water running straight into the Bay of Bengal, taking a lot of top soil with it, Stern claimed. The Himalayas are the source for all the major rivers of Asia—the Ganges, the Yellow River, the Yangtze. Three billion people, almost half the world's population, live there.

Stern, the World Bank's former chief economist, accused governments of being "slow to accept, that usable water is running out." He called it a "non-renewable resource," and since it has "not been priced properly," it has been used without restraint.

Then the real target becomes clear—farming, which makes up 70% of global water demand!

The Goldman Sachs report calls water the "petroleum for the next century," offering huge rewards for investors, "who know how to play the infrastructure boom." The U.S. alone needs up to $1 trillion (£500 billion) in new piping and waste water plants by 2020, they say. China is another target of the report, as is Asia in general, which it says has added to the strain, due to its "shift to an animal protein diet." China makes up 21% of humanity but controls just 7% of the water supply, and faces acute challenges. Egypt has threatened military action against any country that draws water off the Nile without agreement.

Goldman Sachs advises investors to invest in the "high-tech end" of the world's $425 billion water industry.

London Boasts of Domination of Commodities Speculation

June 5 (EIRNS)—What used to call itself "the British Invisible," i.e., International Financial Services London (IFSL), has published a report on how London benefits from commodity speculation. According to their summary:

"Global physical and derivative trading of commodities on exchanges increased more than a third in 2007 to reach a record 1,684 million contracts according to a new edition of IFSL's Commodities Trading report. The OTC [over-the-counter] derivatives market has also seen strong growth in 2007. The notional value outstanding of banks' OTC commodities derivatives contracts grew by 27% to a record $9 trillion, largely due to an increase in OTC traded energy contracts. According to the report, in the five years up to 2007, the value of global physical exports of commodities increased by 17% while commodity derivative trading on exchanges increased by 213% and the notional value outstanding of commodity OTC derivatives by 540%.

"London has benefitted from this increase in trading due to its position as the largest global centre for commodities derivatives trading after New York. The major exchanges located there accounted for 17% of global commodities' exchange trading in 2007:

"Liffe is Europe's biggest exchange for 'soft commodities' with 12.8 million contracts traded in 2007.

"London Metal Exchange is the leading global exchange for non-ferrous metals with a 90% share of global trading and record turnover in 2007—92.9m contracts.

"ICE Futures is Europe's biggest exchange for energy products. Turnover grew for the tenth consecutive year in 2007 to reach 138.5m contracts.

"The bulk of global OTC trading in precious metals is also conducted in London through the London Bullion Market association."

The British Invisibles insist that commodity prices have skyrocketed because Chinese and Indians eat more, but they admit that this has raised "interest from investors and limited supply of some commodities. The increase in prices has attracted many investors to the commodities sector including short-term speculators such as hedge funds and more recently longer term institutional investors looking to diversify their portfolios. Funds invested in the commodities sector totalled over $400bn in the first quarter of 2008, with more than $150bn invested in commodities indices in 2007."

High Oil Prices Hit Indonesia, India, China, Taiwan, and Malaysia

June 3 (EIRNS)—The Indonesian Finance Ministry on May 21 announced a sudden increase of 29.7% in gasoline prices for consumers. Why? Indonesia, like other countries, has been subsidizing gasoline prices for consumers. But with hyperinflation raging, Indonesia's state subsidies ended up representing more than the amount of money spent for the budgets of education, health, and infrastructure combined! In the face of these events, says the French daily Les Echos, neoliberal voices are demanding the abolition of all subsidies in most of these nations, claiming that keeping gasoline prices artificially low through state aid creates distortions on the markets and doesn't encourage consumers to develop more "economical" behavior.

India last year spent $19 billion to subsidize oil products. On June 2, Prime Minister Manmohan Singh declared that his government had no choice but to increase the price of gasoline for consumers. Indian refineries are buying expensive oil and selling it more cheaply domestically. Singh called for a political consensus to adopt more "rational" economic policies. Unlike other countries, India hasn't increased prices of kerosene for four years, he said.

China also subsidizes gasoline prices for consumers. Sinopec, the largest gasoline vendor in the country, saw its profits drop by 72%, while those of the other giant oil company, PetroChina, shrank by 31%. As a result, their stocks fell, triggering an overall drop on the Shanghai market. The Chinese oil companies buy at $135 per barrel on the world market, while selling domestically at a price equivalent to $75 a barrel. Sinopec says it loses $430 for every ton of diesel or gasoline refined, and extra costs are estimated to rise between $50-100 billion for the Chinese oil companies. The latter now are pressuring the Chinese government to raise prices to consumers.

In Taiwan, the public gasoline distributor is expected to go bankrupt if nothing is done to solve the problem. And Malaysia's new government has maintained subsidies, despite the fact that gasoline subsidies alone represent more than 10% of the state budget.

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