By David L. Brown
The credit crunch is about to put global hunger on the fast track. According to an article on the Financial Post web site (here), grain and other foodstuffs are piling up on docks because shippers cannot be assured they will be paid by potential buyers. Here are the lede grafs from the Canadian investment newspaper:
Grain piles up in ports
Canada next in inability to finance shipments
The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.
Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don’t trust the financial institution named in the buyer’s letter of credit, analysts said.
“There’s all kinds of stuff stacked up on docks right now that can’t be shipped because people can’t get letters of credit,” said Bill Gary, president of Commodity Information Systems in Oklahoma City. “The problem is not demand, and it’s not supply because we have plenty of supply. It’s finding anyone who can come up with the credit to buy.”
So far the problem is mostly being felt in U. S. and South American ports, but observers say it is only a matter of time before it hits Canada.
“We’ve got a nightmare in front of us and a lot of people are concerned it’s going to get a lot worse,” said Anthony Temple, a grain marketing expert based in Vancouver.
There is other evidence that the shipping industry itself is being hit hard by the credit problem and resulting slowdown in international trade. A friend of mine who subscribes to a private online service concerning international shipping called me yesterday with this news: “A few months ago it cost $1400 to ship a 20 foot container from Hong Kong to Hamburg. Do you know what it costs today?”
“Well, I suppose with fuel costs higher the price must be higher,” I hazarded. “What’s the deal?”
“Right now you can ship a 20 foot container on that route for $350,” he said.
Yes, obviously the owners of container ships are in dire straits and are desperately bidding for the rapidly disappearing freight business. The cost to maintain and operate a container ship goes on whether it is loaded to the gunwales or running empty with its Plimsoll line thirty feet above the water. Just as Detroit keep on making cars and trucks they cannot sell because they are committed to the cost of a union workforce, overhead, and contracts for components, the ship owners are willing to run at a loss just to keep at least some revenues flowing.
And things are bad all over. This little anecdote tells the tale of the situation in which the auto industry finds itself. A couple of months ago I reported here that the local Dodge dealer was offering brand-new quarter-ton 2008 Dodge pickups at 50 percent off the sticker price. That seemed to me to be a terrible sign of desperation on the part of Chrysler Corp. and its dealers. But yesterday I heard there is an even sweeter deal out there. Buy a 2008 Dodge pickup truck for half price — and get a new $12,000 automobile FREE.
Yes, FREE. Chrysler Corp is so desperate for cash to keep its doors open that it is virtually giving away its backlog of otherwise unsalable cars and trucks. That reeks of the kind of desperation that you see when a failing retail store puts a GOING OUT OF BUSINESS sign in its window and begins to sell off its inventory prior to locking the door.
Here is another piece of news from yesterday: The big electronics chain Circuit City has been placed on a watch list from a service that warns manufacturers not to ship their products because the buyer may not be able to pay for them. That spells almost certain doom for Circuit City, which is teetering on brink of insolvency. Another chain, CompUSA is closing stores and may also be insolvent.
But to get back to the subject of food piling up on docks, this is truly a dangerous sign. Where would that food be going, or in this case, not going? One place is Pakistan, which just a couple of days ago announced that it would run out of money by the end of this month. That is, the entire country would be broke. Pakistan is about twice the size of California, has nearly five times the population at about 174 million, and where three quarters of the land is rocks and mountains. It depends on imports of food as well as oil. They have begged Saudi Arabia to keep sending them oil, even though they cannot pay for it, and so far at least the Saudis have refused.
There are many more countries that rely on food imports, and which do not have large stocks. They have been accustomed to buying food as they need it, not being able to afford the cost of building up stocks. With the supply lines suddenly shut off, what is going to become of hundreds of millions or perhaps even billions of poor people in the Third World when there is no food? Not a pretty thought, is it?
The present crisis, which as I explained in a recent post is a panic, not a recession or depression, is tearing through the world economy like a pack of rabid wolves, leaving only havoc, fear and disaster. It does not look likely to stop anytime soon, and even if things finally settle down there has been vast damage done.
It is not just companies such as the Big Three automakers, shipping lines, or electronics chain stores that are in trouble — entire nations are running out of money. They are broke, to put it bluntly. So far Pakistan is on record, and so is Iceland. Who will be next? Is this a race to the bottom that will leave entire regions of the world filled with so-called failed states such as Zimbabwe or Somalia? Sorry to say, but it seems likely.
But why has this panic spread so far, so fast, and so deep? I think it can be seen as a result of too many years of whistling through the graveyard on issues such as exploding population, declining resources including food and oil, easy credit, greed, political impotence, and plain old denial.
We have discussed these and other subjects here for more than two years. After all, in case you had forgotten, the subject line in this weblog’s title is “Your portal to the near future and the dangers that lie ahead.” Well, the near future is here, and the dangers are here, too. The whole rickety house of cards is tumbling down, and the world will never, ever be the same again.