Thursday, October 27, 2011

The Euro crisis and Rubber Prices

Anybody reading world news, especially on the economy, hasn’t seen one day go by without new disturbing headlines about the fate of the Euro, the Euro zone, and the consequences for the world economy.

This has been dubbed the second financial crisis; the first being the bursting of the real estate bubble in the U. S. (As it happens I was a victim of that bust as real estate prices plummeted to a level below the actual value, which came at a time when I was selling my house in Florida. Instead of pocketing a nice profit, I had to make do with just a fraction of that.) Anyway, the second financial crisis, although in part directly connected to the real estate bubble in the U. S., has been brought on by governments in the Euro zone overspending, which led to some countries having more debt than their GDP, e. g. Ireland, Portugal, Spain, Italy, and the most notorious of them all – Greece. Ireland’s banks were heavily involved in U. S. real estate. Some of them had to be bailed out by the government. Portugal and Spain had their own real estate bubble that could only burst as well, as all bubbles eventually will. Italy doesn’t know how to manage money to begin with – how can a country that has had 50 governments in 50 years ever properly administer itself? Greece, with no notable industry besides tourism, an overblown bureaucracy, a non-existent tax collection system, no administration to speak of, and where the public sector comprises 80% of the economy, submitted to the seduction of easy money and loaned money left and right to maintain an opulent life-style, as it would be termed for private individuals.

All countries have in common that their governments issued bonds to finance the big holes that had opened up in their economies - Ireland, Portugal, and Spain for bailing out their banks and Italy, which so far has not needed any help yet, for overspending in the public sector. I don’t want to go into any more detail here. If interested you can always find more in the big international newspapers – both off and online.

Now what does all that have to do with rubber prices? Well, what you read in the papers is that the ‘market’, in other words the ‘speculators’, immediately reacts to any news. Over many years, I have been following this with dismay. It had come to such a point that when there was even the slightest hint of a problem in the Middle East oil prices would jump up within a minute. One could even think that the news when some Middle Eastern potentate so much as broke wind the markets would react. It could be the Middle East, it could be China’s impending cooling of its economy; the reasons are as manifold as there are imaginative financial instruments.

Now for the past 18 months it has been the crisis of the Euro zone. Economists fear that when the rich European nations, mainly Germany and France, bail out their ‘poorer’ co-members, they would overextend themselves and cause the failure of their banks with catastrophic consequences not only for their economies but also for the world economy altogether. Adding fuel to the fire are those private, for profit rating agencies that feel called upon to judge the value of bonds, countries, companies, practically everything. They even downgraded the U. S. debt. The U. S., despite its economic woes, still is the world’s largest economy and without doubt will eventually pull out of its recession and its deep debts, however long it takes. Anybody who thinks that they won’t be able to redeem their treasury bills must live on another planet. So what is that downgrading supposed to mean and to achieve – perhaps maximizing profits for short-sellers? Promptly, the announcement had an instantaneous effect on the markets. The Dow Jones plunged 635 points. Ironically, treasury bills rose the next day – now who can understand that? One shouldn’t forget that those same rating agencies had given toxic real estate derivatives an AAA rating until the whole thing went bust.

Similarly, any news that comes out of Europe regarding the bailout of Greece has an instantaneous effect on the markets. Reading the news about this is like a roller-coaster ride. One day it’s more or less positive, one day is negative, with the negative outweighing the good news. It seems as though journalists thrive on painting bleak pictures.

Initially, all this had virtually no effect on rubber prices but when the Greek problem came up, they eventually took their hit too. In 2010, the strong Chinese economy overshadowed the Euro crisis. China is the largest buyer of natural rubber. Rubber prices remained at an all-time, and somewhat uncomfortable, high. This lasted until April/May of 2011 when Greece’s debt was finally reduced to junk status by the rating agencies. Paired with the fear of a weakening of European and U. S. economies, which would lead to a lowering of Chinese industrial output and reduced purchases of raw materials, this news started the slow but steady decline of rubber prices. This graph aptly illustrates this fact. These prices are for processed crepe rubber on the Malaysian Rubber Exchange; the Cambodian prices follow the exchange.

Month Price/100kg CSK5L

Jan 503.13
Feb 559.70
Mar 539.82
Apr 557.86
May 519.51
Jun 505.83
Jul 485.49
Aug 474.17
Sep 452.31
Oct 427.09


Prices for latex sold in Cambodia to processing plants follow a similar pattern as this graph shows, although there was a short recovery period in June when Euro zone ministers committed to a bailout package for Greece. Prices are $/kg.



Let’s see what this does in dollars and cents for the operators of rubber plantations in Cambodia. 40% of all plantations are smallholders, that is, they range from 5 to 50 ha. Let’s use a 30 ha plantation and an average production of 150 kg of dry latex per ha per month, or 450 kg for 30 ha.

Since February is the so-called wintering period on a plantation, we will start with April of 2011. The owner could record gross revenues for each month until October of this year.

April $ 17,313
May $ 15,255
June $ 17,454
July $ 16,098
August $ 15,606
September $ 15,686
October $ 13,185.

Compared to April the owner had approximately $4,300 less in his pocket in October; this translates into 25%, and that’s a lot of money in anybody’s book. Reason: the news had become extremely volatile in October; some even feared the collapse of the Euro zone. In previous months, the average price levels were helped by intermittent better news, which caused upticks in prices. A major positive decision was reached this week and so far, rubber prices hover a little above their lowest level in 2011. Of course, commodity prices are very high to begin with and an adjustment might be called for, but then markets don’t always react logically.

To those who think this is still a good income in a country like Cambodia I can say they are right but should not forget that those are gross revenues; operating expenses are considerable what with expensive fertilizers, fungicides, manpower, machinery, etc. Additionally, in order to get to this revenue level the owner needs to invest first in land, land preparation, then in seedlings, management, etc. Until trees produce good amounts of latex, the owner has to wait roughly 10 years. Although production usually starts after 6 years, yields are not in the higher range until year 10. So it’s not just sitting back and collecting money.

If you follow a certain reasoning you could say that Greece and the markets not only hold the European governments hostage but the smallholders in Cambodia too, not to mention the huge investment plantations. Greece with its unconscionable policies, and the speculators with their insatiable greed make their actions felt throughout the world. The rubber plantations are but a small part in the overall picture.

It is ironic that a country with a population of roughly 10 million people could get the large European economies (Germany with a population of about 82 million, France with 56 million) into a severe recession, not to mention the reverberations in the rest of the world. It is equally incomprehensible that the markets, say speculators, can determine a government’s policies. Mind you, this is a sector of the economy that does nothing but shuffle papers or hit keys on a computer keyboard and with that produce profits (or losses) for investors. It’s called investment banking. Most of the large banks are engaged in investment banking. They accept huge risks and but when they incur huge losses they all of a sudden become too big to fail and need to be bailed out by the government, in other words, taxpayers’ money. It is an old axiom that only money makes money, consequently if you have no money you cannot invest, but if you have money and you can invest and make a tidy profit, you should also be ready take a loss.

When I went to business school, I learned how to assess the value of a company based on its assets, liabilities, productivity, market position, long-term viability, earnings and earnings potential, etc. Those things have all gone out the window. The dot com bubble showed it, the real estate bubble showed it, and any subsequent bubble will show it as well. There is nothing wrong with trading in stocks, bonds, and such, but when it comes to buying and selling stocks, you don’t even have with borrowed money, a line must be drawn. Just look up the term ‘hedge funds’ and you will get an idea who dominates the financial world and who can ruin many an existence.

If you are interested in following the timeline of the Euro crisis, go to http://www.bbc.co.uk/news/business-13856580

Wednesday, October 12, 2011

Get out of Here

The SRP expelled two of their parliamentarians, one MP and one Senator, from their ranks for disloyalty. The affected politicians claimed they were kicked out to make room for some relatives of SRP higher-ups, otherwise known as nepotism. Critics of the party have accused the SRP of nepotism before, leveled even at their revered leader Sam Rainsy.

Claims and counter-claims, accusations and denials; these are the hallmarks of political life everywhere. So this incident is not really noteworthy for its happening; but I believe what is noteworthy is the fact that the SRP has no qualms about expelling members that it feels are no longer of value to the party. Also noteworthy is that, according to press reports, the party leadership made the decision. I am not sure what kind of inner-party procedures are set down in their by-laws but it reeks of an arbitrary decision – and this from a party that always portrays itself as the truly democratic political party in Cambodia.

The expelled ex-members indicated they would bring a lawsuit against the party. The party spokesman stated in response that the courts do not have jurisdiction over intra-party affairs. This spokesman is an MP himself and one must scratch one’s head and possibly raise an eyebrow or two at such pronouncements. An MP who is not cognizant of the fact that courts always have jurisdiction over disputes, no matter whom or what it involves, should probably seek employment elsewhere. You can bring a lawsuit against anybody if it is based on existing law. Of course, the outcome of that lawsuit is another question altogether.

Tuesday, October 11, 2011

A sort of funny story….

.....or maybe not. Petty crime is just as widespread in Cambodia as everywhere else. It starts with people stealing the make and type emblems off cars – the hybrid emblems are especially popular these days - and goes all the way to burglaries.

I live in a gated neighborhood in Phnom Penh with guards at three gates. They patrol the neighborhood at irregular intervals, both day and night. The community is walled in; barbed wire is mounted all around. Sometimes I wonder whether these guards would really be any help if you needed them. They don’t let just anybody in and ask motodups and tuk-tuks their business. But if you drive a car nobody will stop you. If the car is big enough they will give you a snappy salute.

Security is supposed to be good in those neighborhoods; at least my wife used to believe so. One recent night I was awoken by some loud noise. Being half asleep I couldn’t really make out what this was – a party, an argument, or what?

The next day we learned that a burglar had broken into a house nearby. On making his exit he encountered the 14-year-old daughter who returned to her room from a bathroom downstairs. She screamed her lungs out, grabbed the thief by his sleeve and tried to keep him from escaping. But she was no match. The burglar wrestled free and escaped over the balcony.

The people in the house are an American family. Now here is the baffling thing. They had been burglarized 4 times before. Each time the burglar entered the house through an open balcony door on the third (or some say second) floor. Nimble people can easily climb up to those balconies. Most Cambodian houses feature iron bars in the windows. They are an ugly sight but an absolute must as any builder will tell you. But all those bars won’t help if the door is left open.

The parents realized they had been burlarized after each incident – obviously money was missing - but failed to tell their kids so as not to frighten them - not altogether a smart thought. Consequently the kids didn’t feel they needed to observe the simplest form of safety precaution by keeping their doors closed, never mind the floor. Their house is located on the outer perimeter. The wall runs about one meter behind their house. The two adjoining houses are empty. On the outside of wall there is dirt trail – very convenient for any would-be burglars; equally convenient is that there is a gap in the barbed wire between the properties. They can just stroll along that dirt path and look who left the door open. I can only presume this is exactly what the thief in this case did. Having gotten lucky one time he just thought, ‘Well maybe I’ll get lucky with some other careless people.” He may have been surprised himself that he could break into the same house 5 times, assuming it was the same man. How na├»ve or stupid can that American family be?

The take each time: between $500 and $1,000.

After that incident, we heard that burglaries are not that uncommon in this community. People told about several of them; in one case the booty was a cool $100,000. Ah, these Cambodian people. They just love to keep their money at home, like there aren’t any banks in the country.

If I have more than $100 in my pocket, that is a lot. Who keeps money at home? Even if you want to do a large transaction, you can always go to the bank first thing in the morning. Unfortunately, checks are still a rarity in Cambodia’s business circles.
A house like this; easy to scale, right?

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