Return to traditional values or an even slipperier slope?

Economic crisis has major implications for diet, health and other food issues.

Martin Shuker, KFC’s chief executive, says that the chain’s cheap prices are helping win custom. “We do offer good value, so you can buy a bargain bucket and feed a family of four for a tenner, [which is] definitely appealing in these difficult economic times,” he said. Does anybody else find this SCARY?

I seem to remember having myself predicted some sort of return to austerity, or more "traditional values" this year in response to economic decline and falling consumer confidence, it seems however, that in the UK for example while people are turning their backs on the fashionable restaurants, gourmet, ethical and health foods that boomed as incomes peaked, far from cooking up cheap healthy veg at home they are filling up on buckets of fried chicken, takeaway pizza, supermarket value brands and stuffing themselves with comfort foods as the recession deepens.

The high street landscape is already begging to change as the likes of Domino's, Subway, Aldi and Lidle implement expansion plans in response to the strong growth they are enjoying in the current climate. This is not the change we needed!

It strikes me that there are various fundamental issues/questions here, two major points for analysis and action standing out:

1. The premiumisation of "health" and "ethical" - the use of health and ethical categories to boost profits worked while incomes were rising but this is now unravelling in response to weakening consumer making the question of whether it is appropriate to be paying a premium on health more prescient than ever.

2. Poor consumer choices - why do consumers choose unhealthy foods over cheaper healthier ones? Why do consumers choose expensive health foods when they are buying more branding than health benefits.

The Era of Cheap Food is Still Over Too!

Last year and up until recent unprecedented hikes in agricultural commodity price started easing, it was the "structural price rises" in food commodities that were at the top of everyone's minds and the agenda, I blogged here about the "structural shift in agricultural commodity prices" and food as "the new oil"and about how high prices, price volatility and lack of market availability was driving the growth of a new trend towards bilateral agreements bypassing international markets in order to secure directly stable prices and supply.


While global commodity prices have gone into overall decline (despite notable exceptions like cocoa etc.), the impact of the current financial and economic crisis on agricultural markets may mean that we cannot expect any return to business as normal, with major implications for agricultural markets and consequently trade, food security and politics. The drying up of trade finance resulting from financial and economic crisis is increasingly damaging the ability of markets to function efficiently, helping to perpetuate the bilateral food trades and deals that had grown increasingly more popular in response to rising prices and increased volatility over recent years since a whole list of countries increasingly are turning to barter where trade finance is hard to obtain.

For those moreover, who presume recent price hikes were a bubble now pricked with a deflationary pin and whom are anticipating a return to mean, there is in fact perhaps little cause to suppose that the current easing in agricultural markets is anything structural at all. Despite the deflationary pressures of the current environment, the underlying upward pressure on global food prices generally is likely to be maintained, particularly as the need to incorporate the true cost of resources into our food supply becomes increasingly pressing. Certainly we should be prepared for food price issues to return with a vengeance when the economy starts to recover, as no doubt will oil prices (see "The Era of Cheap Oil is Still Over") - with supply constraints only exaggerated further by the unravelling of production and investment resulting from the current economic downturn.

As a side note, it is interesting also to note the impact of currency market volatility on food prices, with current weakness of the sterling here in the UK for example, not only cancelling out declines in dollar denominated commodity items, but also pushing up the cost of local products since UK farmers enjoy increased pricing power domestically thanks to their ability to sell to Europe at a higher return on account of sterling weakness. This sort of general volatility is increasingly pushing food up the agenda and resulting in a rash of protectionist think tank papers etc. I attended a talk hosted by the UK's Fabian Society and given by UK Secretary of State for Environment, Food and Rural Affairs Hilary Benn on the topic of food at the end of December, the first speech made on food by a cabinet minister in the UK for many decades, and it is not only the UK that food is receiving attention.

The questions posed by these and other trends are massive and highly significant. Questions concerning the location, means, ownership, control, distribution etc. of supply and more. These are questions that need addressing and which I hope to start exploring here.

The Era of Cheap Oil is Still Over

Today's low oil prices the anomaly..
If you are breathing a sigh of relief thinking that the free fall oil prices went into late 2008 and cheaper petrol at the pump are a return to the proper order of things and the end of a painful speculative bubble, don't be deluded, the era of cheap oil is still over: today's low oil prices are more likely only masking temporarily a looming crisis and recent high energy prices may be expected to return with a vengeance.

Unwinding of demand in response to downturn accelerating this trend...
Indeed, if oil supply was not keeping up with demand driving prices up last year, the current collapse in oil prices is only accelerating this trend. As oil producers slash production to try and prop up prices and new and non-traditional (deep sea; oil-sands etc.)projects are scrapped as plummeting oil prices mean they are no longer profitable etc. we are seeing a scaling down of production not unlike the coiling of a spring. The big question is, will supply not be even more out of sync with demand when the global economy starts to recover?

Investment in the alternatives we will need also suffering...
The concerning thing is that it is not just traditional oil, gas and other fossil supply that which is suffering as investment dries up, alternative technologies which are more important now than ever, are also seeing investment dry up as low oil energy prices make technologies that were competitive with oil when oil prices were high, left high and dry now that prices have fallen so much. Only Monday it was reported that "The economics of the world’s biggest offshore wind-farm project are “on a knife-edge”, ...its viability called into question by the falling prices of oil, gas and carbon dioxide emissions permits."

Current global trends unsustainable says IEA.
At the current rate of decline, said the IEA 2008 oil outlook report, oil production from existing fields will fall to just 30 million barrels a day by 2030 – or roughly 73 million barrels short of the expected level of demand. The chances of finding the necessary new demand from somewhere to fill this gap is - besides being horribly undesirable - also highly implausible. The reports executive summary starts "Current global trends in energy supply and consumption are patently unsustainable." And concludes with a similarly potent call to arms: "Time is running out and the time to act is now."

Without drastic measures the market will only force feed us more cruelly the medicine we are rejecting...As this report highlights the era of cheap oil is over and unless drastic measures are taken to reduce energy consumption and speed up the development of new energy sources, the world could be headed for a serious energy crisis as soon as 2015. If this happens, and without wanting to sound melodramatic, our current economic woes will be entirely overshadowed by this crisis. It is important that investment in new and alternative energy is sustained and expanded to ensure we are as prepared as we can be against the comming supply shock.

Comment: Utility companies again

Following up on an old post of mine

http://informationotherwise.blogspot.com/2008/10/comment-unscrupulous-energy-utilities.html

I was interested to see these articles run on Guardian Unlimited recently (Maybe I should write for the Guardian?):

Energy firms press customers to sign up for premium-rate tariffs

http://www.guardian.co.uk/money/2008/dec/15/energy-providers-fixed-rate-tariffs

Watchdog tells energy firms to speed up price cuts

http://www.guardian.co.uk/business/2008/dec/17/ofgem-energy-companies-prices

Would still be interested to know more about these companies marketing strategies.

Comment: Unscrupulous energy utilities try to lock customers in at peak tariffs

The Daily Express today ran the headline " £100 OFF GAS BY CHRISTMAS" this predicted cut in gas bills comes after the wholesale cost of gas dropped 30 per cent from its summer peak. In a message of hope to households, TheEnergyShop.com said power giants should soon pass on these lower prices to their customers.

This headline came as no big surprise to me, since I had rather expected a falling off in gas prices after the summer peak in wholesale prices began to soften. While I have certain doubts over how swiftly utilities companies are likely to pass these savings on to customers since they are always quick to pass on costs but slow to pass back savings, I was surprised and concerned to receive a direct marketing call from British Gas around the time that wholesale prices started softening, aggressively pushing a pricing plan that would lock me into current gas rates at for the next year.

When I asked the sales person "what happens if gas prices go down?!" his only answer was "When did your gas bill last go down, this is an opportunity you should not miss - lock your prices in now". Despite my concern at the danger of locking in prices at peak level the sales person aggressively pushed this plan (the contract I discovered when I really pushed also including a £70 escape fee).

Call me cynical, but my concern is, that British Gas knew very well - far better we may reasonably presume than myself - that prices had likely peeked and were thus expecting downward pressure on rates, and were actively trying to lock customers in at peak level while they could. I never had an offer to lock prices before, but then prices were going up before. I happened to be on the whole informed thanks to the nature of my job, had I not been, I may very well have taken the guys point and locked myself in to a very disadvantageous deal and found myself unable to benefit from falling energy prices amidst a deepening recession.

This sort of shameless abuse of the inevitably often under informed customer seems to be relatively common practice across many service providers all of whom make extensive use of direct marketing campaigns. A consultation of other utility company web sites like EDF reveils that many are recommending fixed price plans.

I would be interesting to investigate further the direct marketing strategies of these firms in particular, and the consumer groups and demographics they are target ting.

News: Russia to buy Iceland!

Reuters just published that Iceland's central bank announced today Russia's agreement to provide the country with loans of 4 billion euros ($5.4 billion) - about half of Iceland's c.$11 billion GDP.

The central bank said the loans were for 3-4 years on terms that would be 30-50 points above Libor rates (very attractive loan terms).

The Icelandic Kroner has stabilised dramatically following this announcement and regained some of the value it has lost over recent days.

Figure 1: Icelandic currency









The big question is why? And what does this mean for the future? The loan terms etc. suggest Russia is not pricing risk for the well run but high risk Icelandic economy the same way the market is (see Figure 2). This however, is not a financial investment for Russia - the geopolitical implications for the world may be far more significant than are the economic implications (though for Iceland of course both economic and geopolitical implications are likely to be significant!).


Figure 2: Iceland - Credit Default Swaps (market price for risk of default)










Shall write on this as soon as I have a moment!

Analysis: The return of history and the beggining of the end for US empire?

Does Wall Street’s crack-up presages the beginning of the end for American power and global dominance? Empires of the past have seen their ideologies corrupt, their economies corrupt, their currencies devalue, finally loosing their military supremacy. The US increasingly is relying on its military. Cracks appearing here as well (Georgia etc.).

The US is short of metals, short of oil, increasingly short of water for agriculture, has debt beyond belief, a crippled and dysfunctional financial system, a population accustomed to living beyond there means, consuming things they do not need and cannot afford, as well as the most powerful military force in the world.

Russia has heaps of savings, no liquidity concerns given the cash government is sitting on, natural resources - oil, gas, minerals, vast agricultural land and resources etc. Russia is increasingly challenging the value of foreign investment, (macro economic problem according to Russia, other countries may follow) for less volatile internal investment and displaying increasingly assertive foreign policy. I have to say, long term, if I were a betting man, my money would not be on the USA.

There is increasing posturing for control and resources - new players, China, Russia, as well as non state players like islamist movements - this is leaving Americans feeling increasingly insecure. Unfortunately, the American reaction seems to be to fall back on military power as recent global events (Georgia etc.) seem to be pushing voters more and more to the "reassuring" figure of McCaine - veteran generation - but this is not going to help America's relationship with the world. If America wants to retain its grip on power it needs to display a little more benevolence. If I were America I would be doing everything I could right now to make sure I had some friends ahead of when the revolution comes, since it is obviously going to be America first with its back up against the wall - Scary thoughts.