Some of the strongest votes of confidence in the world’s free market economies often come from communist countries.
Although their politicians and state media prattle the tired Marxist platitudes that sound good to frustrated masses and university undergraduates, their officials and government agencies are often some of the world’s better users of free market instruments.
Look at China’s (until recently) voracious hunger for U.S. treasuries. The giant communist nation might officially disagree with Anglo-Saxon type capitalism, but it’s certainly been willing to fund it and put almost all of its nation’s savings into the most capitalistic economies.
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(Whether their confidence in our ability to competently run a semi-free market economy is justified is a matter one might question, given our propensity to over-regulate, insanely deregulate and play politics with vital economic structures and policies . . .)
Communist Cuba’s sole grain buying agency showed itself rather adept in 2008 with the tools of the free market when it used derivatives to hedge its exposure to what it believed could be rapidly rising grain prices. As prices shot towards the stratosphere through spring and into the summer, the Cubans were paying big money for Canadian and other exporters’ grains, but collecting offsetting gains from their earlier-established futures positions. Overall in 2008 they paid far lower prices for wheat because of their hedging than they would have if they hadn’t been covered.
On Friday I met with the director general of the Cuban agency grain program, Alexander Perez, and he admitted that prices went far higher than he and his officials expected. But they were certainly pleased to be protected from the massive spike in prices suffered by many others who weren’t covered.
That included the company of the other man I met Friday, whose Ecuadorian milling company generally buys cash grain and doesn’t actively practice much risk management. They stick to the business of buying grain and making flour and accept the everyday price violence of the market. Not only did they get caught in the escalating market, but they became so worried about getting supply that they made major purchases in the higher parts of last year’s wheat market.
“At one point we thought that it was just going to go up and up and up, so we bought a large portion, and that ended up being a terrible buy for us,” Pedro Vega told me.
As wheat prices fell, Vega’s company didn’t get much relief because it had already bought more than it usually would, so it had to work through expensive inventories before it could collect on the good fortune (for them) of falling grain prices. This year things are going better.
For Cuba the losses came the other way: as prices fell late in 2008, their futures positions started to lose money. After they wound down those positions they decided to step back from hedging in 2009 and have generally benefitted from doing so.
What I found most interesting from talking with Perez was seeing how active a communist state like Cuba can be in assessing the market and taking what could be considered a speculative position. They aren’t always hedging their exposure. They only move to lock-in prices when they feel they’ve got a sense of where the market’s moving and want to take advantage of it. That’s a lot more aggressive than a lot of grain companies and other commercial enterprises, which eschew speculation and just conservatively hedge their existing cash positions.
Often the companies and organizations of the capitalistic West seem more conservative than some of the pseudo-communist states and their agencies, which are far more willing to dabble in the more sophisticated instruments of the free market.
Sometimes, like this year, that comfort of the communists in trusting capitalistic tools seems well placed, as Cubans benefit from cheaper bread than they’d be baking if they’d been more skeptical of the market.
But I must admit I wonder how well this communist trust in the West’s solid and dependable financial mechanisms will hold up if something goes wrong with the U.S. economy, or the U.S. currency, and the life savings of China’s putative communists disappears, like Bernie Madoff’s returns. Let’s hope the communists are right to trust capitalists like us.
