Weak economy drag on food prices
As the worst drought in a half century persists in the U.S. Midwest crop region, prices for crops are soaring. Corn has increased nearly 50 per cent in just six weeks, soybeans for August delivery rose 44.5 cents, and wheat prices reached the highest level since the spring of 2008.
Not surprisingly, consumers are concerned about food prices, and many dread looming hikes in coming months that will especially penalize the poor. Looking at the overall commodity landscape, however, there’s no call for panic, at least not yet.
Since 2008, when food scarcity in many regions around the world prompted riots and demonstrations, people have become sensitive to sudden increases in commodity prices. Despite this, the proverbial “new normal”, which suggests more market volatility and abrupt market swings, is still not engrained in our collective thought processes. Beyond the distressing headlines and alarmist sound bites lies reassuring factors which we need to keep in mind.
First, the FAO (the United Nation’s Food and Agriculture Organization) recently mentioned in its latest assessment that the overall supply and demand situation in 2012-13 remains adequate. Its 2012 food prices index is actually down compared to the same time in 2011. The FAO also made the point that an abundant supply of rice, a key strategic food staple for almost half the world’s population, will assure food security for the most populous regions. Enough wheat and other grains remain available for export as well.
Second, world agriculture is more productive than ever, thanks to improving technology and genetic know-how. World cereal production is expected to hit another new record this year of 2.4 billion tonnes, which is approximately 2 per cent higher than last year’s record high. Many farmers have access to more arable land as they are using better fertilizers to increase yields.
One factor which played a significant role in the 2008 riots was the cost of energy, a significant input cost driver for food processors, packaging and distribution. The price of a barrel this year is nowhere near 2008 record levels, and the Bank of Canada predicts a lower price for oil in weeks to come. For this year, energy costs are a non-factor. Even though the drought may be driving prices upward, lower gas prices are in contrast affecting prices downward to a greater degree.
Last, the slower than expected global economic recovery will also impact food prices over the next few months. Based on recent reports, both emerging markets and industrialized economies are now affected by economic uncertainties. Food distributors and retailers are astute market analysts, as they closely monitor consumers’ capacity to pay for food. Since many food categories have many substitutes, they are likely to charge what consumers are able to afford in any given markets. Again, the situation is very different than in 2008 when the global economy was more robust.
What is driving commodity prices upwards is speculation; too much, that is. Speculation is obviously nothing new to markets. However, excessive speculation in derivative markets has enhanced the rate of price swings in recent years. Agriculture has recently attracted what many call “price manipulators” – hoarders and influential speculators who are attracted to commodities, as they are believed to move in an opposite direction to equity markets, thereby providing a hedge against inflation. As a result, regular traders are not able to hedge their risk, and farmers are not getting benefits of price rise, while manipulators cash in. Regrettably, therein lays the real story behind current soaring prices.
The “new normal” in agriculture calls for a regulated global framework which would put price manipulators in check. Some countries like the U.S., the EU, and India are changing regulations, but change is not coming fast enough, and it needs to.
Dr. Sylvain Charlebois is Associate Dean of the College of Management and Economics at the University of Guelph.