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Food costs, luxury cars and more... - Views on News from Equitymaster
 
 
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  • Mar 28, 2008

    Food costs, luxury cars and more...

    • Rising food prices have caught attention of economists, central bankers and governments the world over. Besides freak weather, the dramatic changes in the global economy, including higher oil prices, lower food reserves and growing consumer demand in China and India have been pronounced as the chief causes. One of the key driving forces, petroleum prices, has increased the cost of everything from fertilizers to transport to food processing. What is rare is that the spike in food prices has hit all major countries simultaneously.

      Food costs worldwide spiked 23% YoY in 2007, wherein grains went up by 42%, oils by 50% and dairy by 80%. As per Bloomberg, at the end of December 2007, 37 countries faced food crises, and 20 had imposed some sort of food-price controls. The U.N.'s World Food Program is facing a US$ 500 m shortfall in funding this year to feed 89 m people. Food prices rose 4% in the US last year, the highest rise since 1990, and are expected to climb as much again this year, according to the U.S. Department of Agriculture. At the same time, in China, fighting inflation from shortages of key foods is a top economic priority. Inflation reached 7.1% in January 2008, the highest in 11 years, led by an 18.2% jump in food prices. In Japan, the ethanol boom is hitting the country's important culinary ingredients, as biofuel production pushed up the price of cooking oil and soybeans.

      In the past decades, farm subsidies and support programs allowed major grain exporting countries to hold large surpluses, which could be tapped during food shortages to keep prices moderate. But new liberal trade policies have made agricultural production much more responsive to market demands - putting global food reserves at their lowest in a quarter century. Economists say that for the short term, government bailouts will have to be part of the answer to keep unrest at a minimum.


    • India truly is the land of diversity. This adage is seen being upheld by Indian companies as well. Take the case of Tata Motors, which now owns the world's least and some of the most expensive cars. Acquiring two iconic auto brands 'Jaguar' and 'Land Rover' from Ford, one of the world's leading automobile manufacturers, has put Tata Motors on the global map of passenger vehicle manufacturers. The entire objective of Tata Motors behind the acquisition is largely garnering the ability to leverage the technology and R&D strengths of the two brands and not focus too much on their turnaround and profitability. Further, Tata believes that Land Rover and Jaguar will benefit from India's low-cost design and IT ability - and boost sales in Asia. At the same time, with this acquisition, Tata Motors will get access to technology that can compete with the best in the business.

      Nonetheless, there is another question hanging over the deal - Tata's future once its 70-year old patriarch retires (Mr. Ratan Tata is not due to step down until he is 75 - in December 2012 - but has said he would like to retire earlier). Having said that, both, the launch of Nano and the Jaguar-Land Rover deal does a world of good to the company's ability to survive the competition onslaught and its long-term growth prospects.


    • After Bear Stearns, it is the struggling homeowners and mortgage loan-laden customers that are looking for some relief from the Fed. 'Moral suasion' you may call it but US bank consumers recently created an uproar about the bailout of Bear Stearns, when the Federal Reserve agreed to pay up to US$ 30 bn as part of JPMorgan Chase's purchase of the leading global investment banking and securities trading company. The retail customers have contended that they need more help from the government than the Wall Street investment banks.

      The Bear Stearns deal is not the Fed's only direct exposure to the problems in the financial markets. The Fed also announced earlier this month that it would lend billions of dollars directly to Wall Street firms at the Fed's so-called discount rate, a right previously reserved for commercial banks. In addition, the Fed has said it will now accept troubled mortgage-backed securities as collateral up to US$ 200 bn of loans to Wall Street.

      Further, the US government would be considering a proposal that would have the Federal Housing Administration guarantee billions of dollars of new, lower-cost loans to troubled homeowners. Many borrowers would see their total principal on these new mortgages reduced under this program. According to an outline of this bill, homeowners could receive US$ 30 bn in mortgage interest subsidies. Thus the American Central Bank does not seem likely to have its coffers full for very long.

     

     

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