China’s higher food costs would result from a regulatory change, while Brazil’s food supply is feeling the pinch of tighter credit. In both cases, grain supplies will be affected.

In China, the government scrapped its 11-month interim price control measures on grain and some food products starting from this month after inflation began to drop.

Inflation had taken its toll on Chinese consumers, with food the biggest contributor to lower consumer spending.

For example, in January of this year food prices in China bolted a staggering 18.2% over the previous year as consumer prices rose 7.1%. By April, food prices were up 22.1% over the same period in 2007 as inflation hit 8.5%. By November, China’s pricing controls had curbed inflation to 4% as food prices rose 8.5% percent in October – down dramatically from the beginning of the year.

Now that market forces are back in play, it’s expected that grain prices in particular will begin to rise again. With the government controls lifted, farmers and traders can resume to set market-driven prices without permission from the government.

In Brazil, farmers are struggling to keep up with demand in the face of tighter credit.

A global cash shortage inflames a tough market for Brazilian food producers, already reeling from slumping crop prices and higher costs of farming supplies such as fertilizer.

Soy beans is a major cash crop for Brazil and it looks like production will drop this year — indicating that soy prices could rise on the open markets. Hurting for cash, Brazilian farmers are forced to cut the size of their crops under these hostile conditions.

As grain prices soared during the first half of 2008, Brazilian farmers accrued large debts in anticipation of ongoing increases. But now that the prices of grain and other commodities are dropping, Brazilian farmers are saddled with huge debts that further inhibit their borrowing power.

The problems are expected to contribute to a 2% drop in Brazilian soybean production for the 2008-2009 crop year, according to the U.S. Agriculture Department.

Meanwhile, the world’s population continued to grow, from 4.4 billion in 1980 to 6.7 billion in 2007. The United Nations is projecting an additional 40% increase by 2050, when the population is expected to reach 9.2 billion.

As China and Brazil contribute to higher food prices, this could be a good time for investors to enter the beginning of a longer term cycle.

Whenever Chavez gets a chance, he gives speeches in which he pretends to support the people that socially need it the most.Paradoxically, their policies have negatively affected the general population rather than helping them, hitting the bread basket (canasta basica) harder in the same lower social classes that he claims to protect.

A mother saying to her child: “Son; would you go to the store and buy a pack of noodles and a bottle of corn oil so I can fix lunch for us today?” to which she adds: “here, take more money with you just in case the prices went up again today” is, without a doubt, a common household conversation in Venezuela (as a matter of fact, it is a common household conversation in most of the countries with this new food inflation context, but is apparently much more serious in Venezuela).

The worldwide increase in food prices is an issue that concerns us all. To relieve the effect that this has in weaker countries, the IMF is revising a special loan to bring financial aid to the countries that have been affected the most by this increase, as soon as possible.

The seriousness and extent of the situation differs from country to country. Venezuela’s case is one to be concerned about not only because of the foreign pressures on the market prices, but also Chavez’s orders to the government to put even more pressure, a dangerous cocktail and time bomb.

What was Chavez’s idea given the increase on food prices? The answer is simple, price controls, a practice not very different from other neighboring countries. This is the method he used to control prices of a wide variety of other products such as rice and milk, thinking that fixed prices would not affect farm production whatsoever. Does this sound logical to you? What would you have done in farmers’ shoes when the local government decides to fix a price cap on crops as the worldwide prices continue to increase?

The result is written in every basic economy manual; the production has fallen and shortage has taken over the market… Which is something the Chavist’s theory of economics did not contemplate. But that’s not all; this theory also stipulates (most importantly of all) that if producers take back their supply and the market’s demand remains the same, the prices will increase even more.

Local people commonly believe that “Chavez imposes price control to protect the poorer part of the population” However, this situation in price control is what has made the situation worse and has generated greater inflation.

Didn’t Chavez intend to use socialist economical theories to make the distribution of income equal for his people? The answer is yes, but he seems to have forgotten that the greatest threat to the poor is inflation, they are the ones being affected the most by these measures and when the engine hits full speed, their salaries will just not be enough to survive.

Growing inflation is regressive…what does this mean? This can be understood if you compare it to taxes that are used more on those who less have. According to the Central Bank, 45% of the average Venezuelan lower class family’s salary is spent on the purchase of food. So, since the inflationary acceleration is more severe on food products, it is only logical that the poorer families are the most affected.

If inflation in different trades were homogeneous, the lower class would still be the most affected part of the population because they have less coverage capacity compared to higher social classes.

In what situation does Venezuela find itself today? Food prices in the last 12 months have increased in …(take a deep breath)… 41.5% (there is even speculation that this will increase!!). Private estimates show that 15% of Venezuelan families (roughly 4 million people) have an income lower than the basic food basket, and 38% cannot cover the expense of the basic basket.

As inflation soars in Venezuela, Chavez’s popularity is in steep decline, and the situation in this country is unstable day by day. Very few think that Chavez will react in time to turn things around and change his economical policies.

For some it is already too late.

We will meet again tomorrow,

Horacio Pozzo

Please send your comments to paola@latinforme.com

At the far end of the Largo di Torre Argentina, for example, is the spot where Julius Caesar’s body was ventilated. Poor Julius. His wife warned him. His soothsayer warned him. Even his friends warned him that something was up. Still, the man who had conquered Gaul and brought Vercingetorix back to Rome in chains, and then triumphed in the civil war against one of Rome’s greatest generals, Pompey, dismissed his guards and walked into a cheap ambush by politicians, one of whom was probably his own son. “Tu quoque, fili mi,” [you too, my son] he said to Brutus as he was going down, after the unkindest cut of all. But that is the amazing thing about the Romans and modern man too; even when the traps are as obvious as bailouts and Baghdad, they sashay right in.

And over there…at the Domus Aurea, was Nero’s golden palace; a place that saw such debauches as to make Britain’s royals – perhaps with the exception of that ancient Edward – seem like archangels. Nero’s mother was Caligula’s sister, with whom she an “inappropriate relationship.” She plotted against Caligula, and when he was out of the way, married her uncle, Claudius. She poisoned Claudius…and his son, Britannicus, too, so that her own son from a previous marriage – Nero – could become Emperor. Then, fearing that she was losing her grip on her son, she seduced him. But by that time, he was so deep into carnality with slaves, senators’ wives and castrated boys, that her motherly charms couldn’t hold him. So, she tried to kill him. He beat her to the punch, sending his soldiers to skewer her. Tacitus reports that she died in a theatrical way; “strike my womb,” she told them.

Our beat is money, not history. But today we pick through Rome’s huge trash pile to try to learn something.

Everything started to go wrong in the time of Marcus Aurelius, say most historians. Soldiers returning from the Parthian war brought the first major plague epidemic with them. There was a revolt in Egypt. And Germanic tribes pushed across the Danube and the Rhine.

But the real problem began much, much earlier, practically ab ovo. From the very beginning, the Romans picked fights with the neighbors. The small colony had a shortage of females, so the Romans carried off the women of a nearby tribe. “They was sobbin’, sobbin’, sobbin’…fit to be tied,” as the song puts it. From there, one local tribe after another was subdued. And each successful campaign elevated the power and wealth of Rome and led, like antipasto to primo platti, to the next campaign.

As a business model, Rome’s strategy was obviously flawed; like a credit bubble, it required constant expansion. Still it was nice in the beginning. The early days of the Roman Empire were like the early days of the British Empire or the American Hegemony. Expansion opened up new markets and brought in new supplies of raw materials at better prices. Not only was there booty; there were also slaves.

Nothing fails like success. The slaves had an effect on the domestic labor market of the time not unlike Chinese and Indian peasants on today’s labor rates. The price of free labor fell. Another familiar consequence was an increase in speculation and what we would call ‘financialization’ of the economy. Instead, of farming themselves, ambitious Romans outsourced, setting up huge agricultural estates all over the empire, which were operated by slaves. This had a further effect of lowering prices on farm products. Small, independent landowners couldn’t compete. They went to the cities. Or, they joined the army.

Eventually, Roman expansion reached its limits under Trajan. Then, the military machine gradually changed from a profit-making institution manned by Romans, to an expensive peace keeping force staffed largely by barbarians. Worse, the clattering of chains was no more to be heard in the Delian slave market. Now the problems really began. The government had begun distributing free bread, in order to keep the urban mobs quiet, a program similar to today’s Tax Rebate checks. Already, under Augustus, one in five people in Rome depended on the “dole.” Then, Rome’s balance of trade grew increasingly negative. This gave rise to something else that will be familiar to us: inflation. Nero took 10% of the silver out of the denarius. Then, under Marcus Aurelius, it was down to 75%. Finally, by the third century, the denarius was made of brass, with a silver coating. Consumer prices soared. Diocletian’s solution was very similar to what Richard Nixon would do many years later – The Edict of Prices, a system of price controls.

With no more slaves shuffling into the city, Rome turned to its remaining small farmers. First, it subsidized the farmers – with the ‘alimenta’ – like our own crop support programs. Then, desperate for food, it requisitioned grain and cattle from them directly…and forced the farmers to stay with their land, like serfs. The farmers’ situation became so miserable, they began to sell themselves into slavery. This traffic became so heavy that the government banned the practice in 368AD.

Modern politicians and central bankers have nothing on their ancient forebears. Bailouts…monetary stimulus…subsidies…giveaways – the Romans had a solution for every problem. And every solution brought new problems…until the weight of them crushed the whole empire.

Regards,

Bill Bonner
The Daily Reckoning

Editor’s Note: Don’t forget – you can hear Bill speak at this year’s Agora Financial Investment Symposium in Vancouver, British Columbia. This year’s theme is “View from the Peak: Seeking Profits in a time of Risk and Scarcity” – and it’s your first look at investment opportunities, global market concerns, and the best investment bets across the globe.

The Symposium takes place July 22nd and July 25th, 2008…but tickets are sure to sell out, so secure your spot today by clicking here for all the details:

Agora Financial Investment Symposium – July 22-25