Russia. August. 2010. Part 1: Grain.

(cont. in Russia. August. 2010. Part 2: Wildfires. )

It seems that August continues to be most intense month in Russia's political life. The heat wave followed by massive wildfires in the central Russia and Siberia add to the long list of events that took place in Russia's most contemporary history: August Putsch (August 19-21, 1991), Financial crisis (August 17, 1998), Kursk Submarine Accident (August 12, 2000), Russian-Gerogian Conflict (August 8, 2008), Sayano-Shushenskaya hydro accident (August 17, 2009).

This summer the heat wave in Russia reached absolute record temperatures. There were 21st temperature record registered in Moscow this summer. Two records were broken in June, ten in July and ten in the first half of August.

Low rainfall and hot temperatures damaged 32 percent of the country’s grain crops, said Russian Agriculture Minister, Yelena Skrynnik on July 23. This satellite vegetation index image, made from data collected by the Moderate Resolution Imaging Spectroradiometer (MODIS) on NASA’s Terra satellite, shows the damage done to plants throughout southern Russia.

Hot and dry summer resulted in massive drought, which led the government ban its grain export. Agricultural analysts are estimating that grain output will suffer a 40% loss this year, cutting previous forecasts of 70-75 million tons to 59.5-63.5 million.

Prime Minister Vladimir Putin suggested the ban could remain in place until well into 2011. Mr Putin said that this year's crop could be as low as 60 million tonnes, well below last year's 97 million, and Russia needs almost 80 million tonnes to cover domestic consumption, so even with this ban, there might be a shortfall of nearly 20 million tonnes for the Russian consumer.

President Medvedev's verified Twitter account (KremlinRussia) posted a link to presidential memo, which assigned responsibilities to different cabinet members.   The two biggest concerns so far are (1) monitoring internal dynamics of food prices (and if necessary intervention) and (2) mitigating the possibility of grain reserve imbalance between different regions of Russia.

It is too early to say if Russia's neighbors may follow suit. A senior Ukrainian Farm Ministry official said this year's wheat harvest could fall to about 17 million tons, below the consensus in a Reuters poll last week of 18.1 million and down from 20.9 million in 2009. However, the decision to ban Ukraine's export has not been made.

Analysts already expect the London-listed Russia's deep-water Novorossiysk commercial sea port on the Black Sea may lose up to $40 million over a ban on grain exports imposed by the Russian government.  Novorossiysk port also serves as a transportation hub for Russia's landlock neighbors.

Now let us zoom out from Russia's map and look at big picture.  The total drop of Russia grain production (plus its closest neighbors) is going to be 20-25 million tons lower that previous forecasts. Fortunately such amount will not significant impact world's grain output.  Take a look at data provided by UN's Food and Agriculture Organization. World grain production fluctuates between 670-685 million tons per year, in which  25 million ton or even 30 million tons shortage makes less than half of a percent of global food production.

Moreover, the reaction of other food commodities suggest us that there is no upward reaction to the expected drop of grain output in Eurasia.



Then the question is What's All The Fuss About? And here I can give you two different explanations.  First, the ban is Russia's internally driven policy directed toward domestic audience. Unfortunately, its domestic media machine works so efficiently that it spins its internal message into global media.

This leads us to the second and more important point: Russia's domestic policy is unintentionally helping international food commodity traders.  I am concluding this post with SPIEGEL magazine article  Speculators Rediscover Agricultural Commodities. The article was published on July 29, 2010 before the Russian ban on grain, nevertheless it captures the trend:

Driving the price explosion was the growing use of agricultural commodities to produce biofuel. But 2008 was also the year in which, for the first time, the public realized that grain merchants were no longer the only ones trading on the exchanges (in their case, by buying grain futures to hedge against poor harvests), but that the major players in the financial markets had discovered the lucrative trade in agricultural commodities.

Last year, Goldman Sachs earned $5 billion in profits with commodities alone. Other major players include the Bank of America, Citigroup, Deutsche Bank, Morgan Stanley and J.P. Morgan.

They are no longer merely offering classic funds, but are now trading in financial instruments that function similarly to the subprime mortgage loans on the now-collapsed US real estate market. With these instruments, known as collateralized commodities obligations, or CCOs, profits are based on market prices. The higher the trading prices of wheat, rice and soybeans, the bigger the profits. The market's behavior reminds one of the Internet bubble at the beginning of last decade and the fluctuations just prior to the financial crisis, then-Merrill Lynch President Gregory Fleming said in May 2008.

Bloomberg reports about Kazakh National Bank seeking bidders to manage $100 Million of its $25b.+ National Oil Fund

"Kazakh Oil Fund Seeks ‘Boutique’ Bidders to Manage $100 Million"

http://noir.bloomberg.com/apps/news?pid=20601095&sid=argSOp2PrPKE

You can read the official announcement on External management tender for «Global active equity» and Investment Guidelines at http://www.nationalbank.kz/?docid=539&switch=eng

More info: http://www.swfinstitute.org/fund/kazakhstan.php

Congress, Goldman Sachs and the Hindsight Bias

Being a student of System safety I could not ignore the public hearing that is taking place in the US Senate on Goldman’s handling of high-risk mortgage business in 2007.

The bigger is the failure or the devastation caused by an accident the more difficult it is to reconstruct the preceding events, processes and systematic factors.  In the case of Goldman, its handling of highly securitized mortgage deal called Abacus, is overshadowed by even larger devastation of the financial crisis that went far beyond the Wall Street.  The public outrage with the economic crisis that has been boiling for the last two years has suddenly found actual addressee, Goldman Sachs Group, thanks to the SEC’s investigation and the independent inquire by the Senate’s Permanent Subcommittee on Investigations.

Goldman’s interaction during the hearing fuels the outrage even further as it treats testimonies of its executives as part of the group’s upcoming legal battle with the SEC.  By fighting against possible legal litigations and denying any wrongdoing, Goldman gets deeper into the trap of becoming the villain, who in public’s eyes is blamed for the financial crisis.  On top of that, the tug of war between two parties in the Congress makes the Goldman’s hearing major strategic battle that will allow the ruling party push its bill on financial regulations.

The goal of this essay is not to defend Goldman, but to explain the phenomena of hindsight bias. As people try to make sense in such confusing environment, it is easier to focus one’s attention on specific individuals and become bias towards the end result.  Sidney Dekker, the Swedish system safety expert, describes the hindsight bias in form of four different, but interrelated reactions: (1) Retrospective, (2) Counterfactual, (3) Judgmental and (4) Proximal (The Field Guide to Understanding Human Error, 2006).

People tend to react post factum and backwardly reconstruct sequence of events in a linear manner.  In the aftermath of an accident, one can easily list logical arguments how and why people should have foreseen and prevented the upcoming events. We easily judge people, who failed to take proper actions. We focus on their personal shortcomings such as absence of proper training and experience, health conditions and hours of proper sleep, etc.  We usually tend to focus our attention on people who happened to be closest to the accident in term of time and space.  In the case of Goldman Sachs, Fabrice Tourre was designated as the sacrificial lamb, who will be slaughtered to satisfy the crowd.

Hindsight gives the investigators better and more complete information in comparison to people who made the decision prior to the failure.  It provides with facts that become midpoints in the linear logic flow that the investigator reconstructs. As we walk backwards, each facts is perceive not as an “intersection point” with a list of equally valid choices, but rather as point of the process when/where incorrect decision was recorded. Hindsight bias exaggerates the importance of the recorded facts versus other events that are not directly related to the specific accident.

Specific sequence of events shapes its post-factum interpretation. It connects events in specific post factual manner. What Sidney Dekker calls tunnel vs. zigzag.  The tunnel vision that the bias creates, oversimplify the history of the accident, with linear logical flow and binary (right and wrong) choices.  As part of the oversimplification process, causality of events are oversimplified as well. As the result, the hindsight prevents us from differentiating between what is know after the accident and what was known by people prior and during the accidents.

What are the objectives of the Congress and the SEC? Get more popularity with the public; re-direct public dissatisfaction toward the Wall Street; take down Goldman Sachs; push for new regulations; etc? As in any other accident investigation, the public, the Congress and the SEC will focus on assigning blame on particular individual instead of focusing on learning the root causes, especially if the objectives of the blame are so vague.