Is there another food price panic on the way?

24th September 2012

The Telegraph picks up the theme of 'agflation', saying that the world is on track for record food prices within a year: "They are being driven upwards by the climb in grain and oilseed prices as US crops weather the country's worst drought since 1936, while the farming belts of Russia and South America suffer through similar water shortages.

"What we are seeing represents the third major rally in global grain and oilseed prices in just half a decade. Worse is to come, new research warns. World food prices look set to hit an all-time high in the first quarter of next year – and then keep rising."

The fear is that rising prices will trigger social unrest similar to that seen in the last food crisis in 2008. High food prices were thought to have contributed, at least in part, to the Arab Spring. It also presents problems for Western governments trying to tackle inflation. Can they keep such accommodative monetary policies if inflation rises on the back of higher food prices?

Ketan Patel, socially responsible investment analyst at Ecclesiastical, says that there are important differences with 2008. The original food crisis was based on a supply shortage across the board, but this shortage is based more specifically on a shortage of corn and soybeans. He says: "This is the basic food stuff for animals, so farmers are seeing their input costs rises significantly. The result, in some cases, is that farmers have been taking herds to slaughter."

This is likely to lead to a short term rise in prices as a glut of meat comes onto the market, but then a substantial rise in prices next year. The trend is likely to persist longer for cows than for pigs, as it takes longer to rebuild a herd of cows. He believes that this is more a problem for Western consumers than Eastern staples-based consumers: "It will have much more impact in the West than the East. The East will simply go back to staples, but food demand is less elastic in the West and people may simply have to get used to higher meat and dairy prices."

Patel says that the high corn prices will also raise questions over the percentage being diverted towards ethanol production in the US. Among others, the UN and agricultural pressure groups are now lobbying presidential candidates to address the problem. The director general of the United Nations' Food and Agriculture Organization (FAO), Jose Graziano da Silva, said suspension of the quota would allow more of the crop to be diverted for food production: "The worst drought for 50 years is inflicting huge damage on the US maize crop, with serious consequences for the overall international food supply. The situation reminds us that even the most advanced agricultural systems are subject to the vagaries of the weather, leading to volatility in supplies and prices, not just on domestic markets, but also internationally."

Patel believes that there may be political action on this, which will ease the pressure on food prices.

Equally, some reports have suggested that the problem will not be as bad as feared: "The Agriculture Department said the country's corn crop would be the smallest in six years and the soybean crop would be the smallest in nine years. But even though USDA lowered its crop estimates for the United States and Russia, they are bigger than expected.

"USDA's estimates of the corn and soybean stockpiles at the end of this marketing year were also larger than traders expected. One factor: high corn prices have prompted cutbacks in livestock production, reducing demand for feed and keeping more corn in stockpiles."

The comment boards propose a number of solutions, from adoption of Genetically Modified food-stuffs, to restricting population growth, to more sustainable methods of farming. arthurs, for example, says: "The world should be storing at least 12 months food. The present system of exploitation and beating prices down by the multiples has brought farming to its knees. There is now a missing generation as most farmers off spring have left the land for an easier life. If the weather continues to decline and in the UK, get any wetter, a lot of farmers would be unable to continue. There needs to be a plan rather than bumbling along observing one crisis after another."

For the time being, Western consumers paying more for meat and dairy products may hurt growth, but it is unlikely to create a mass panic. Equally, the Bank of England and other central banks have shown themselves reasonably immune to high inflation when setting monetary policy. This is not the same as the crisis of 2008, which hurt developing market consumers and triggered widespread social unrest.


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