To further understand the food crisis and provide an account from a professional point of view, we interview Mr. David Lynch, the Head of Wholesale Bank Operations of Standard Chartered Bank China. With a wide variety of knowledge ranging from economics to agricultural, we decided to consult him on his views of the food crisis. Mr. Lynch was also a former member of the Australian Wheat Board and General Motors which goes along well with our topic. The interview was conducted face to face by Qiao Yu at Mr. Lynch’s apartment from 9.30pm to 10.10pm on 7th of February 2009. Due to the environment in which the interview was conducted being filled with other audio disturbances, we are sad to say that our audio did not capture a recording clear enough for our online audience.
1. Do you believe that it took too long for the world to realize the true dangers of the food crisis?
I think it did take too long going into the spike of the commodities cycle last year. I think you saw a huge amount of speculation pushing up commodity prices, not just in terms of food but also in terms of base metals, and a lot of other consumables which made the world feel that it was never going to end. I think one of the major impacts of the food crisis, which you obviously saw here in China, was shown by a lot of basic foods such as pork or rice or other grains. The prices were pushed up immensely, and the prices were pushed up to a point where it was beyond the fundamentals of the underlying commodity itself. A lot of speculation is pushing that up now. I think that the negative effect of that is as you go into poorer parts of the world, access to just basic food staples for many is just going to become unaffordable. So I think we saw probably what many would think as the peak of the Q3 or Q4 in 2008. I think most commodities are now returning to more of a fundamental prospect but there are some differences, I think, in terms of goods that are mined or materials that are mined as opposed to the food stuffs, because the fundamentals that are driving up the costs are actually different. So we have seen the metals, precious metals, iron ore –those kinds of things really come off significantly from their highs. In terms of the food staples though, you haven’t seen the movement to the same degree. If you look into a lot of parts of the world, there’s talk about global warming or abnormal weather patterns. Those kinds of things actually have a lighter bearing on the fundamentals of the food crisis. So I don’t think you’ve seen the affordability gap close the point where a lot of the third world would be considering that they have affordable access to even basic food staples. So I think the simple answer to your question would be, yes, it has probably taken too long for the world to realize and I think for most of the third world, they’re still going to be reliant very heavily on foreign aid to support their situation.
2. In your opinion, to what extent is speculation in the commodity market affecting oil prices?
I think speculation again, throughout a two year/two plus year cycle, actually played a very key role. I think what you saw with a group of oil producing nations who have the ability to manipulate the demand and supply cause a supply shortage over the past several years. Now a lot of that supply shortage was actually manipulated, and that started to fuel the perception around that world that the world was actually running out of oil. You saw the two big emerging markets, China and India, starting to consume fossil fuels like you have never seen before. China was going through double digit GDP growth up until at least this year. We have seen slowing down in the Chinese economy, but still very heavy growth. Enormous booming construction and basically a lot of demand for fossil fuels was actually fueled by growth in China and India particularly, but also other emerging markets. I think what that created was a real market for the speculators to jump in again, in the view that the GDP of China would continue to grow at double digits forever. So a lot of speculators jumped in in order to make a short gain. I think the height achieved by a barrel of oil came in at $150 USD; so if you look at the current price, you have seen huge tapering off in term of the oil price. And again, prices shifted back to something more akin to the actual fundamentals. An interesting impact that that had, you know I previously worked for General Motors , GM was often maligned by much of the press for producing what everyone saw as gas guzzling vehicles. Basically, I think that a very positive impact that came of that was that it forced a lot of automobile producers to really focus on fuel efficiency because those bigger engine vehicles started to become unaffordable for a large part of the population. So now you’ve seen the price come back to fundamentals. I guess most of us would actually hope that there’s some good that has come out of that. I think a lot of the next generation vehicles will be the hybrids, the alternative fuel cell cars, which have probably come about due to the surge in the oil price.
3. Do you think it is an effective decision for countries to impose export bans to provide domestic food security even though such decisions will result in the rise of food prices?
I think the answer to that question goes back to the fundamental human need. People have to eat, and they have to eat to survive. If you’re one of the people to be lucky enough to live and grow up in a country that has an abundant supply of food, clean water, even the most basic staples, like rice and grains, that’s probably not a question that you would ever consciously think about. For various reasons, I think in many parts of the world, they don’t have access to those staple products and I think for some of those countries, I think export bans are implemented just because of the basic requirement for people to eat and stay healthy. I think it’s warranted, actually. A lot of those nations are actually very poor. They need tight decisions at certain points of time if they are one of the world’s largest suppliers of a particular food source in order to manipulate and control the price, and use that to force inflows of other goods or money that they need. Some of that cross manipulation we talked before about, you know, oil, oil prices are driven by a select few oil producing nations. Basically in terms of food stuffs, you see the same situation. You got certain parts of the world that grow and produce specific types of food products, whether its oranges, or palm oil. You’ve seen Southeast Asian nations that often work together to manipulate prices. And at certain times, we think export bans to protect those in their own domestic market may at times make sense. If they had an oversupply situation, it’s a very different story. Obviously, for the interest of the country, they would be encouraging exports, and it’s the countries who have a shortage of food who are the ones who generally consider an export ban. Otherwise it’s damaging to the farmers, so that’s a simple answer to your question.
4. What is your view on the creation of a “World Food Bank” where countries in need can borrow food grains on preferential terms and return the quantum after the crisis is over?
Well, I think it’s a fundamental role of the developed world to take care of poorer nations and give them education and training and access to the supply of food. If you go into a lot of the developing markets and developing countries, they don’t have access to the techniques and education to know how to produce foods in a sustainable manner. Even things like the ready supply of seed are a fundamental requirement. There’s many different ways by which, which the particular problems in the developing markets could be addressed. I think the concept of a food bank is an interesting idea. If you look at the way the world works today, most of the developed world is supplying continuously into large parts of Africa, for example. A lot of that food supply is driven through humanitarian efforts. It’s driven through donations made by people in richer countries, and a lot of it is driven by donations made by the corporate world. I think a lot of this really goes back to the inner conscience that governments and people in the developed markets have to raise their awareness of the conditions in the third world, and a question about whether they are going to do it or not. And I do see increasingly, at least in the corporate word, a greater sense of desire to help those in need. Do I think a food bank would be the answer? I think its one possible solution, but I don’t think it’s the only solution. A food bank is one way of providing to the countries in need but I do think there are many other possible solutions there and probably no one solution is going to address the problem.
5. What are specific actions taken by banks to counter the raising food prices?
In terms of the banks, to be perfectly honest, I don’t think the bank’s an active participant, if you like, in the countering of the food crisis. The role of a bank, in most respects is an intermediary. So, if you look into the financial markets, banks in some respects, you can argue, have helped give the speculators access to look for short term gains, and it might have in some ways contributed to rising food prices. But on the flip side, there have been many positive things that the banks have done with directly intervening to address a specific problem. Now, a couple of examples of that: one of the most recent Nobel prize winners was awarded the prize for the work he had done in establishing micro financing operations; and a lot of the micro financing was aimed at small, rural areas, small farmers, some of them only have a limit to access to capital, but they may not be able to convince a bank or a lender, any other sort of lender, to facilitate a loan for a small business. Now, a lot of the small businesses stick with farms. Now I think what that is doing is helping facilitate the supply side of the problem. I think this is true in large agri-businesses as well. I think increasingly, you see, because of this corporate and social responsibility, I think banks are looking to lend to and support businesses that have a higher social conscience. The agri-business sector is certainly a very important sector for commercial banks. I think the role a bank can play to help address the food crisis is multifaceted. I think increasingly, micro financing is one way I think that supports the clients in the agri-business sector. And I think also what every company needs to do, not only banks, is to have a comprehensive social responsibility program to help those in need. It’s not only about going into a new market and extracting as much profit as you can in the shortest possible time. Most multi nationals, when they go into developed or developing economies, need to be very mindful that they should be there to not just generate profits but to help with the social issues that are being faced in that country. In some countries it’s food, in other countries it’s a whole different set of issues. So that’s a glimpse on what the banks are doing in that area.
6. What is the most significant impact of the food crisis in China that you noticed?
Well if I talk about it personally, myself, I have been in China now, it’s my fifth year. The most visible impact of it has been on the price of pork. I think that’s been very broadly published in the press here. I live in a big city, so I’m probably one of the fortunate ones who has a comfortable income and lives in a comfortable house but obviously I do spend time travelling out into rural china, and I think the noticeable impact of that is people always talk about the emerging middle class in markets, which is a huge portion of the population. But it’s really easy to forget about the lower end of the scale and I think the thing that has the most significant impact. I think if you’re one who’s on the scale of the low income or low wage, doubling in the price of pork for example, eats a very large portion out of your disposable income. The more the people are spending on just basic necessities, whether its rice or pork or vegetables, the more they use their disposable income, the less their ability to save. So I think what the concern is here is that you see that particular situation leading to social unrest. It goes back again to what I said: people have to eat to survive, if they don’t have sufficient money to buy the food that they need to survive, people become desperate, and that’s a very concerning situation. People will start to experience the impacts of the economic downturn from the financial crisis and the food crisis haven’t yet subsided to the same degree, and probably wont. There’s no doubt that people will be struggling at the lower end of the income scale to survive, and that will result in a certain amount of unrest. So a lot of that comes back again to the conscience that we all have to be wanting to address that situation. Look outside at our own world: Shanghai’s a big city; it’s an affluent city; the average income here is significantly higher than that of the tier two and tier three cities, so we shouldn’t be oblivious to that.
7. Were there any similar problems to the current food crisis during your stint at the Australian Wheat Board?
Yes, I think an interesting thing is, well, I’m an Australian and there is a thing that Australians are used to. You probably picked a good day to do the interview as in my hometown Melbourne, today was the hottest day ever on record. Forty-six point four degrees was recorded but why is that important? Well, I think Australia is actually quite famous for natural resources and for its agri-business, so Australia is a very large exporter of diary products, of grains. But that whole agri-business sector is dependent on water supply. If the farmers do not have enough access to water, it starts to cause all sorts of problems and it has a significant impact on prices. So if you have a season where the water supply or rainfall is particularly low, that drives a correlating increase in prices, because the supply side drops. So, I think that the thing that I was the most commonly used to seeing at my time at the Wheat Board was that the fluctuations in wheat prices were quite normal. The seasonal impacts that you see on prices could be quite volatile. So as a country, I think Australia’s nearest threat in the needing terms are actually access to water supply to continue to fuel the grain growth. The interesting thing again, about the Wheat Board, Australia, back in the time I was there, had decided to adopt what they call the single desk policy and that basically means that unless it was for massive shipment of wheat under a specific export license, the wheat was marketed by a single desk, and that single desk was managed by the Australian Wheat Board. So basically the Australian Wheat Board had two classes of shareholders, one was the grain growers themselves and the other class was the public. So that actually put them in a position where they had a very significant amount of control on the global wheat price. Australia was one of the world’s largest producers, and still is one of the world’s largest producers of wheat. So couple of things that that did, again when you have that type of monopoly situation, they had a significant influence over the world price of wheat. You would also get to see the seasonal fluctuations where in another part of the world, say Canada for example, that might have had a very good season. As a consequence, the price of Australian wheat as it was marketed overseas would fall as a result. So, interesting set of circumstances, you get some other problems. I think a lot of it goes back to the actual storage and handling procedures. For various reasons, you would get spoilage due to particular weather patterns. One of the interesting things about wheat is that you can store it for very long periods of time, typically. But certain patterns of weather, like excess moisture in air, can increase the spoilage of wheat. So if those weather patterns are seen, it puts added pressure on the growers and the single desks that ship the products out. I think it was an interesting experience there in the Wheat Board. Whether or not that kind of single desk monopoly is good or bad is a different school of thought but the Wheat Board itself, for very different reasons, for the last couple of years, has been through a major restructure. The management there was involved in a number of very public scandals, one particularly over oversupplying wheat to Iraq during the sanctions that were imposed to Iraq. And that resulted in the flushing out of the management there. I think that was used to basically challenge the question of whether the single desk policy, which is a monopoly, was actually a good thing. So if maybe you wanted to ask me, I would give a view on whether that was good or bad myself, but otherwise I won’t comment.
8. Comparing the food crisis to the recent financial crisis, which do you think has a more notable impact on the public?
Well, I’m going to have to answer that honestly. I think it really depends on where you are in society. Sitting here in my home in Shanghai, my answer would be the economic crisis because a few extra dollars a week in terms of pork or rice doesn’t make a difference honestly. I think if you are in a developing economy, third world economy, or you don’t have a high disposable income, I think undoubtedly, no question, the food crisis has had a bigger impact. There’s no doubt. I mean if you look at the lower end of the spectrum, you do have, even in China or countries like Vietnam or Laos or Cambodia, a large portion of those countries’ people will farm themselves and are basically self-sufficient. If they’re not farmers, they obviously have to buy their food supply from markets and, it goes back to the question you asked me earlier. The things that had a big impact on their lives depends on what a rise in food price does to their disposable income. If they spend more on food, they can spend less on their children’s education. They can spend less money on you know, other things that might not be necessities or they might be luxuries, but just goods that are needed to survive and have a reasonable standard of living. So, I think the answer to that question really depends on whether you’re lucky enough to be living on a reasonable amount of income or otherwise. That’s the answer.
9. What do you think would be the best way to attract attention to this matter at hand?
Well, I think the thing that has the most powerful impact on people is pictures, images. I think the images we often see on television, you know, what’s on CNN or Bloomberg or some of the everyday news. I think the pictures of people starving normally hits home to people. I think the difficulty is I think the media themselves do have a responsibility to report the truth and make it stick to people’s minds, because it’s so easy to see an image and say ,“Hey, that’s terrible” but five minutes later they forget. I think reporting factual stories in media on what it is that the developing worlds are experiencing, where are they crying out in terms of medical aid, and for food. And I think that is when the social conscience of the people comes out. I use a very real situation that doesn’t exactly relate to the food crisis but proves my point. I think a thing that really sticks out in my memory was the tsunami, which killed a few hundred thousand people. I don’t think ever in my lifetime have I seen a humanitarian response that that event triggered and I think a lot of that was actually drawn out by the constant reinforcement and repetition by the media. It was an event of such global impact and global scale that I think deep inside, every single human being felt an obligation to help those hit by that particular situation. I think when it comes to the food crisis, a lot it is actually true about repetition and the constant reminder, and I think that actually brings out the desire for people to want to do something about it. Outside of the media, I think the media themselves have to have their own corporate social responsibility policies, even if the story about people starving in Africa is not what people want to see. I think something that is a requirement is to dedicate a certain amount of airtime to covering those social responsibility issues. I do think a lot of the press, to be honest, does quite a good job in covering those issues. For example, the likes of CNN; they do spend a lot of time on those developing markets and provide unbiased commentary on the situation that people are facing and will often help facilitate giving aid to the people in need. So I think that answers your question.
10. How long do you think the food crisis will last? In other words, when do you think prices will return to the normal standard they once were at?
Actually, to be honest, the question is probably a little bit too general. I think it all goes back to the demand and supply situation. If we were to experience a global weather pattern cycle that increased water supply it would increase the produce and yield for farms on a global basis. You’re always going to see pockets where that’s not going to have an effect. I think addressing the supply side of the problem is actually where the greatest attention is needed. Weather pattern is one thing. The continued focus on giving those in the neediest areas, the training, the education, the access to seed, the access to water supply, is the most fundamental thing we can do. It’s the focus on the supply side that’s the most crucial. I think one of the problems that we see with a lot of the aid that’s given, there’s a lot of statistics that you can read yourself on the internet or other sources, and there are enormous problems in a lot of the aid that’s given. It’s not actually getting to the people who need it. So people may feel they made a donation, they may feel that they have given money to a welfare or charitable organization, they may feel that their job is done. But then it comes down to the logistics of actually getting the aid to the people in need. The problem is that kind of solution is a temporary solution. Of course people appreciate the aid, they have food to eat, but it doesn’t address the supply side problem. The only way that you can address the supply side problem is teaching them how to farm and where there are certain areas in different parts of the world that are totally unsuitable for farming. They need to be able to know how to select the right areas that will give them the greatest crop yield. They need to farm in a sustainable fashion, not in such a situation we see in large parts of Southeast Asia where rice paddies, for example, where large parts of the areas are cleared or deforested or burnt and then farmed for a very short period of time (1 or 2 years) and then move on to the next plot. That is not farming in a sustainable manner. There’s ways of putting nutrients back into the ground to make sure that those farmers see many sustainable years of crop yield. I just think fundamentally, that’s where the focus has to be before you see an adjustment in the speedy rice in prices. We all have to hope and hope for weather patterns that will be conducive to better food supply but if cant be the only answer. That’s like playing a lottery, unless you’re a meteorologist, and I think most meteorologists get it wrong, and I think there are more fundamental answers to address. It doesn’t all just come down to farmers either, obviously. There’s pig farmers and diary producers and there’s lots of things and we can start getting into some very murky discussions about genetic modification which is a large topic of interest to many people. Those things are again a supply side issue, I’m not saying genetically foods are a good or bad thing, let everyone be the judge themselves but they are supply side issues that the world is grappling with and again fundamentally, that’s where the focus has to be if we’re going to see any changes in the situation of prices of food rising faster than the amount of basic incomes.
11. What do you think would be the most effective solution to the problems that rising food prices pose?
I think the overall solution is a combination of the things we’ve talk about. You’ve talked about some big issues about appealing to people’s responsibilities. I think the temporary solution is for the developed world to continue to give aid to the people who are in need, whether in rural parts of China or Africa or Southeast Asia or wherever it happens to be. I think that temporary aid is just an absolutely fundamental aid that we have to provide to fuel the developing world. I think again, corporations, not just what individuals do, but corporations have to have social responsibility policies and see that their role when they go into markets is to build sustainable living, sustainable operations; it doesn’t matter what industry they’re in. You need to be looking in these principles and give the people in those markets what they need particularly, again , the education. And I think, more fundamentally, the answer is to address the supply side of the problem. Out of the food crisis, I come from Australia, I think one could probably argue that my home country, Australia, is from an economic sense, is probably one of the beneficiaries because of such an abundance of grains and dairy products. But we need to challenge ourselves: is that actually right? Entire continents of people are facing shortage of food. A lot of those companies need to appeal to that conscience and not put the dollar ahead of people’s lives. So I think as soon as the supply side is managed and most countries can build up a sustainable domestic food supply, the problem actually appeals to itself. You might see, the ability for large corporations to use price manipulation to inflate their profits. You’ll see less social unrest because food supply becomes affordable and you’ll see the situation where people have the skills to support themselves. I think it’s a comprehensive set of answers, I don’t think any one solution will address the problem but if there’s one particular thing, it’s the supply side.