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Oil, Banks and the Food Supply Chain

This morning, one of the world’s largest banks, HSBC, followed the US banks from last week and reported their first quarter earnings. They announced a 50% pre-tax profit reduction, year over year. Like the US banks, this reflected large provisions being made for [projected] souring loans, which is a requirement of the accounting rule changes, introduced post financial crisis (10 years ago). In addition to this, these earnings are notable because HSBC has a large portion of its operations in Asia and this will likely provide some insight into what else is to come for western banks, whose economies were two months behind China with COVID-19.

Last week we reported a dramatic fall into negative territory for the price of a barrel of US WTI oil. This was because of May contracts expiring. The price did recover over the course of the week, but yesterday it took another tumble. As reported by the Financial Times, this was because the world’s largest oil backed exchange traded fund (US oil fund) off-loaded one fifth of its portfolio, fearing another drop into negative territory. Reason? Global supply and demand have dried up.

Finally, the global food supply chain is under strain. Restaurants and Hotels have no need for food supplies and farmers are struggling to import migrant workers to pick the vegetables and fruit. Western countries rely on cheap labor, e.g. Germany welcomes 300,000 migrant workers a year into its farms and approx. 1/3 are available for this year’s season because of travel restrictions. Urgent calls have gone out to local workers, but few are rising to the challenge. This supply of workers has been built up over decades and significantly disrupted. In short, demand from buyers has gone down and migrant workers are not harvesting. A large amount of food will go to waste in the ground and if farmers do not re-plant, there will be a shortage of future supply. Consumer prices will likely rise, so urgent government action will be essential.

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