1st May 2012
At the time of the last inflation announcement, food prices were soaring on the back of a drought in late March/early April: "Figures from the British Retail Consortium earlier this month had shown that food prices posted their biggest increase since August 2010. The Bank of England and the Treasury's fiscal watchdog, the Office for Budget Responsibility, expect the CPI measure of inflation to fall over the year, partly as a reaction to lower commodity costs, including foodstuffs."
But, in spite of a significant shift in the weather, food price inflation shows no sign of weakening. The Financial Times reports that the price of soyabeans is heading towards the record highs last seen in the 2007-2008 food crisis: "The surge in prices is because of falling global production levels following dry weather in Latin America and increased China imports. Soya's wide range of use as feed for cows, sheep, pigs and poultry – and as a source for oil used in foodstuffs such as biscuits and cakes – means its high price could trigger food inflation fears."
This is a theme picked up by Mindful Money economist Shaun Richards in his blog: "(The Commodity Research Bureau foodstuffs index has) remained at much higher levels than would have been expected back at the start of the credit crunch- particularly if we consider the economic difficulties it has led to -. And at the end of last week we saw worrying signs again as the index rose to 427 on Friday."
In addition to the high price of soya beans, Richards points out that corn prices on Wednesday closed at US $ 6.105 per bushel and on Friday they closed at US $ 6.55. Wheat prices closed at US $6.15 on Wednesday and on Friday it closed at US $6.41. Higher corn prices are a theme picked up also highlighted by Bloomberg: "Brandon Marshall, a commodities trader at Northstar Commodity in Minneapolis, said China's demand for U.S. corn and soybeans is abnormally high because of a weak crop in South America. The country is using the commodities for animal feed to sustain pork supplies, Marshall said."
Richards says that the problem is having a greater impact because many of the obvious replacements have their own issues. For example palm oil is currently more expensive than soya bean oil and the price of rapeseed and canola has also risen.
On FT Alphaville this week, there was discussion of a ‘palm oil storm in the making': "According to Standard Chartered a storm is brewing due to a severe structural slowdown in output and the analysts are pretty bullish as a result…On top of the supply side being constrained by under-investment and falling yields, Standard Chartered notes that crude palm oil consumption is trending higher – mainly due to population growth. The oil is fungible across a wide range of applications and is an extremely cost effective substitute for other vegetable oils."
Historically, rises in agricultural commodities have prompted a spiral in inflation and acted as a drag on growth at a time when the global can ill-afford any more headwinds. Also, high food prices tend to affect emerging economies disproportionately. Increasingly there is an awareness that the next crisis may not come from a known-known, such as the Eurozone, but from the sidelines. Agricultural commodities may be the next area to watch.
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