Thursday, July 7, 2011

Today's Major Market Move - Rice Futures up 8% for the Week

The Chinese central bank raised interest rates a quarter point on Wednesday, with the benchmark one-year lending rate now standing at 6.56%. I strongly believe that the main reason for the hike is seen in this chart:

It is common knowledge that the Chinese eat an above-average amount of rice on a per-capita basis. I was trying to find documentation on exactly what percentage of the caloric intake of the average Chinese person is represented by rice, but the best I could find was this link which states that "about 60 percent of the population live on rice." The point I am trying to make is that while in the US the commodity price that the Federal Reserve is probably the most concerned with is that of oil, for the central bank in China it most likely is rice. Although China's per-capita income has risen significantly since 1990, from $350 to over $4000, most of the income gains are skewed towards the east coast and much of the population of the central and western regions still get by on subsistence farming. A 30% increase in the price of the number one food staple, which is what has occurred to rice since March, is economically painful for a significant number of people in China, as well as elsewhere around the world.

We still have a ways to go before we get to the levels seen in 2008 when countries such as India instituted export controls. Back then the price of rice got up to as high as $24.

(Click on the images for a larger view.
Click here for the current chart of Rough Rice Futures.)

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