IBT News Blog

Business Week has a nice summary just posted of the rice crisis:

http://www.businessweek.com/globalbiz/content/apr2008/gb20080428_894449.htm

Rice is obviously one of the most important crops in the world, and has been for a very long time. Much of the worlds poorest populations, particularly in Africa and Asia depend on rice as the primary staple their daily diet.

submitted by Dave

Rice prices have soared tremendously, one statistic in this article is particularly telling I think: Rice from Thailand was priced at $320/ton at the end of last year. Now, a mere four months later, it is $1100/ton. Thats more than a 300% increase! The article points out that most rice is not traded, but consumed domestically.

One thing that is not really discussed in this short summary however is the impact on urban poor. As we all know, urban areas in Africa and particularly in Asia are drawing many people from rural areas. Imagine the impact on these people who spend a large portion of their budget on food, particualrly rice. This is also putting pressure on the very organizations that provide aid for the world's hungry. Estimates are that this spike in rice prices will push an additional 100 million people into starvation conditions. Thats the equivalent of one third of the U.S. population that could feed itself before, but now will be unable to feed itself.

Some other interesting points brought out in this short peice: the role of speculators and the impact of export restrictions imposed by India and Vietmnam (the second and third largest exporters of rice respectively). These measures backfired and encouraged speculators to horde rice. Speculators are playing a big role in making this problem worse, much as they do in the oil markets.

Finally, high oil prices and the drive for biofuel are also contributing to the escalating rice crisis. Because so much corn is being grown for ethanol in the US, that decreases the amount of wheat that is planted. Higher wheat prices makes more people turn to rice for their needs, this increases demand for rice and the price for it.

This problem has the potential to get far worse, lets hope that somehow the price goes back down or at least stabilizes. If it doesn't we are looking at a humanitarian disaster of epic proportions.

An article from the british newspaper The Independent, published on April 23, deals with the financial bubble burst in China which started last October, and which affected the CSI 300, the leading indice of the Shenzhen and the Shangai stock exchanges. This market decline is described by the commentator as the most severe since the record reached by the CSI 300 in mid-October 2007.

The shock was hard for investors of the Shangai stock exchange, as a majority of them are retail investors, that is to say, individual investors who purchased small amounts of securities. Many Chinese people had invested much of their personal assets to buy stocks and take advantage of the financial positive trend. The commentator further explains (this may be directly linked to small investors' inexpertise) that lack of diversification of portfolios for a majority of investors could just make the strike more painful.

As a response to the decline, the Chinese Government lowered the tax on securities transactions from 0,3% to 0,1% on April 24 (that was already its level in May 2007, before the same Government decided to raise it to 0,3% to cool down what was considered as an overheated market at the time). The decision was greatly appreciated by investors at large, since the CIS 300 went up by almost 10% on the same day. But for experts, this governmental intervention will only have a positive impact on the short term.

To read the analysis from The Independent, written before the Chinese Government intervention, follow the link below:

http://www.independent.co.uk/news/business/analysis-and-features/chinas-bubble-bursts-814073.html

Tina Wetchy

Educated consumers with sophisticated palates have come to expect their local grocery stores to be stocked all year round with foodstuffs that normally would not be grown during certain times of the year. These consumers have gotten used to the low prices and welcome further price drops; however, cheaper and non-seasonal produce, among other groceries, comes at another price--Pollution. Particularly carbon dioxide emissions from ships and planes, whose fuel for transporting goods, including food, is exempt from taxes, unlike trucks, cars and buses. Proponents of repealing the exemption and implementing a tax say ending these breaks could help ensure that producers and consumers pay the environmental cost of increasingly well-traveled food. While companies are beginning to include carbon "footprints" on the labels of their products, they are far from accepting any type of taxation on transportation enabling them to take advantage of cheaper processing and production costs abroad.

The notion of a repeal of the agreement barring taxes on air and shipping fuel, and the subsequent taxation on the same is a good idea in theory, however, in practice it will not likely work. While many countries would gladly take advantage of the extra tax revenues, those countries choosing not to implement a tax would incur enormous trade advantages, and create an unbalanced, international "patch-work" of taxation. In addition, there are other avenues that can deal with the problem of pollution as a result of transportation. Educating consumers about products' carbon footprints is a good start; with information at hand, people will make conscious decisions when buying goods whose pollution history is easily traceable. The market, having spoken, will govern how companies conduct their respective businesses and give them an ultimatum; either offset your carbon or find new avenues for cost cutting that are less pollutive.

submitted by Michael

By plegding to help the national airline Alitalia financially, and by announcing the grant of a 300 million euros loan, the newly-elected Italian Prime Minister Silvio Berlusconi has entered into a difficult battle with the European Commission. Alitalia was created in 1947. It started facing severe financial hardships in 2001 and the situation just kept worsening. The Italian company is now close to bankruptcy: its debt averages 1,4 billion euros, and its losses total 1 million euros per day.

See the article published in the NY Times:

http://www.nytimes.com/2008/04/24/business/worldbusiness/24alitalia-web.html?_r=1&scp=1&sq=alitalia&st=cse&oref=slogin

State aids in the European Union, an antitrust law notion

As a Member State of the European Union, Italy must abide by European law and legislation, which has prohibited State aids (European law wording for subsidies) since the founding of the European Union in 1957. This prohibition ensures that governmental actions do not distort competition among Member States and intra-European trade. If the loan to Alitalia was to be analized as a “State aid”, it could be struck down by the European Commission, that is the European antitrust authority. And if nevertheless, Italy decided to implement the measure, the European Commission would be entitled to recover the amount of the loan, as a penalty.

A State aid is an advantage in any form whatsoever granted by national public authorities on a selective basis and which favours undertakings (for the complete definition, refer to Article 87 of the Treaty establishing the European Community:

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:12002E087:EN:HTML )

See also the document “Application of Articles 92 and 93 [currently 87 and 88] of the EC Treaty (…) to State aids in the aviation sector”, which provides for a specific regime of scrutiny:

http://ec.europa.eu/dgs/energy_transport/state_aid/doc/art_92_93_en.pdf

Any aid measure by a Member State must be notified first and exclusively to the European Commission for approval. In the Alitalia case, the European Commission has expressed some doubts about the legal nature of the loan to the airline. Prime Minister Berlusconi argues that the measure would be a “commercial” loan, that is, a loan with the same characteristics and interest rate as any other loan granted on the open market, so that Alitalia would not be treated more favorably than any other economic operator. But the European Commission takes the view that such measure would nevertheless be analysed as a State aid where the creditor knows that advantage is conferred to an insolvent debtor. The interpretation given to the notion of State aid by the European Court of Justice is very broad, both in terms of origins of the subsidy (State or State-controlled entities) and nature of the grant (it may be positive grants of money, or tax exemptions…). Loans with preferential interest rates have already been struck down as amounting to State aids, hence the preference for a “commercial” loan for Alitalia.

Explanations: European Commission strict scrutiny

With respects to subsidies to airlines, the European Commission will scrutinize several points (see “Application”, p.690):

- “whether the loan is made on normal commercial terms” (interest rate charged, security backing the loan sufficiently enough to repay it in the event of default), and

- “whether such loan would have been available from a commercial bank”.

The test used is the “market economy investor” test: if the expenses incurred to invest in the airline would yield structural profits in the future, which would cover expenses, then the loan can be granted (see “Application” p.689). But if the sole effect of the loan is to cover operating losses, than it is sure to be struck down by the European Commission.

Italy has a particular incentive to label the State measure as a “commercial” loan: it has already resorted to subsidies in aid of Alitalia with the consent of the European antitrust authority. The State aids prohibition is not a full-scale one: Articles 87(3) and 87(2) of the Treaty establishing the European Community set forth exceptional situations (called “exemptions”) where aid measures are deemed “compatible to the [European] common market”. In the case of Alitalia, could Italy ground its contention on Article 87(3)(c) and argue that the loan “promote[s] the development of [a] certain economic activit[y]” in a way that preclude airlines market concentration (thus promoting competition on the European territory)?

The reasoning, if used, is not likely to convince the European Commission. The “Application” guidelines set forth a strict scrutiny and a restrictive interpretation of Article 87(3). Insofar as the measure does “not adversely affect trading conditions to an extent contrary to the common interest” (Article 87(3)(c)), the State aid to airlines must be part of a “comprehensive restructuring programme”. In short, the airline should not have received previous State aids, and the aid measure should render it viable structurally, within a reasonable time (for details, see “Application”, p.692 and 693).

But another limit applies: a 10-years buffer period must be left between 2 grants. Italy had already been authorized to grant State aids to Alitalia (1,49 billion euros) from 1997 to 2001. For European Commission Transportation Spokesman Jacques Barrot, any new aid measure should consequently not be granted before 2011.

Suspense

Should this “commercial” loan granted by Italy and designed to save a doomed company and its employees (some 21,000) be upheld? After this overview of European law, the answer by the European Commission is likely to be negative.

On the European Commission and its European trade law policies, see its website:

http://ec.europa.eu/index_en.htm

Submitted by Tina

This article contains comments from the UN and World Bank on the rise of global food prices.

http://www.chinadaily.com.cn/world/2008-04/29/content_6652795.htm

submitted by aurelia

This is an observation about current bank practices and its interaction with the economy. Interesting read.

http://www.economist.com/opinion/displaystory.cfm?story_id=11089594

submitted by aurelia

This article discusses the expansion of several Lebanese banking operations to neighboring countries. See http://www.ft.com/cms/s/0/20702b64-114a-11dd-a93b-0000779fd2ac,noOfParas=2,emailFormat=plainText,storyType=ultralight,dwp_uuid=fc3334c0-2f7a-11da-8b51-00000e2511c8,print=no,_i_email=y.html

The cost of farm land in Europe has risen to a new high level. See http://www.ft.com/cms/s/0/55c8dc0c-1159-11dd-a93b-0000779fd2ac,noOfParas=2,emailFormat=plainText,storyType=ultralight,dwp_uuid=3ee7fd72-e9dd-11dc-b3c9-0000779fd2ac,print=no,_i_email=y.html

This article discusses the impact of freeing trade between the US and the Dominican Republic on the Dominican Republic. See http://www.ft.com/cms/s/0/1ec611da-116c-11dd-a93b-0000779fd2ac,noOfParas=2,emailFormat=plainText,storyType=ultralight,dwp_uuid=a22ad130-8ad8-11db-8940-0000779e2340,print=no,_i_email=y.html

This article discusses Mexico and Canada's support for US efforts to expand NAFTA and the controversy over expanding NAFTA. See http://www.iht.com/articles/2008/04/23/america/23trade.php

The government of Macau is ceasing allowing an increase in gambling operations despite these operations being extremely lucrative to the state as a whole. See http://news.bbc.co.uk/go/em/fr/-/2/hi/asia-pacific/7362683.stm

The leaders of four Latin American countries have devised an agreement to control the costs of food within their countries. See http://news.bbc.co.uk/go/em/fr/-/2/hi/americas/7364153.stm

New information indicates that the rate of business morale in France and Germany have declined. See http://www.iht.com/articles/2008/04/24/business/gcon.php

The Office of the Comptroller of the Currency (OCC) was established in 1863 as a bureau of the US Department of the Treasury. The OCC charters, regulates and supervises all national banks. Furthermore, it supervises the federal branches and agencies of foreign banks.

Typical to many government agencies, the OCC performs quasi-legislative and quasi-judicial functions. It has the authority to issue agency rules, legal interpretations, and corporate decisions concerning banking, bank investments, bank community development activities, and other aspects of bank operations.

The OCC activities are based upon four objectives: 1) to ensure the safety and soundness of the national banking system; 2) to encourage competition by allowing banks to offer new products and services; 3) improving the efficiency and effectiveness of the OCC; and 4) to ensure fair and equal access to financial services of all Americans.

http://www.occ.treas.gov/aboutocc.htm

Recently, the OCC announced the creation of a new group to focus on international supervision, stating that "International banking issues have grown increasingly important to the OCC and the national banking system."

http://www.occ.treas.gov/ftp/release/2008-37.htm

This could raise several questions concerning increased political administration in private banking issues. Essentially, since the OCC has the authority to pass regulations and enforce them upon national banks, it has the ability to affect how national banks engage in international agreements.

Suppose that the President decides that it does not condone political activity in Cuba. To foreclose investment in tandem with US banks, the President orders the OCC to scrutinize prospective banks who are in communications with Cuban investors. Effectively, without formal action or accountability, the executive can unilaterally prevent private investment activity to further unrelated agendas.

Granted, perhaps that is a very cynical view, but in my opinion it is not that improbable for the Executive to exercise his influence in that matter. Do you agree that this could create an avenue for underhanded political activity in international banking? Or do you think that the creation of the new group on international activity in OCC will ultimately lead to better coordinated and more profitable investment activity while protecting the banking industry within the United States?

submitted by: Brian

This article discusses the impact of rising fuel costs on US airline profit margins. See http://news.bbc.co.uk/go/em/fr/-/2/hi/business/7363247.stm