Rising global food prices have become so prevalent in recent years that analysts at Merrill Lynch & Co Inc coined the term, 'agflation' in 2007 — derived from a combination of the words "agriculture" and "inflation". 2008, which is remembered as the year of the financial crisis, can also be described as the year of agflation as increased consumer prices in advanced economies approached 4.5 per cent and the rate in emerging markets doubled that. In the heat of things, oil hit US$147.00 a barrel, bread prices surged 32 per cent, egg prices rocketed 50 per cent, and the cost of wheat skyrocketed even as the consumption-to-stock ratio warranted falling prices. Consequently, global food riots broke out as the average family's grocery bill rang in US$80.00 higher.
Now, almost three years later, soaring commodities prices are once again haunting the world economy, and adverse weather events which continue to hamper crop prospects do not exactly make the situation "a piece of cake". Many commodities are near or above their 2008 peaks, with corn at an astounding US$302.26 per tonne and Brent Crude Oil back above US$100.00 a barrel. In light of the stubbornly resilient demand growth, inventories have tightened and with new supply from northern hemisphere producers not due until Q03 2011, prices will have to rise further to ration demand in the interim. As the demand for grains accelerates to substitute for petrol, farmers are struggling to keep pace with the burgeoning biofuel industry. Furthermore, as farmers switch production to corn from wheat and soybeans, the prices of these commodities are slated to rise as well.
Sure enough, over the last six months, consumers experienced a more than 60 per cent rise in corn prices as the market worked to ration usage and draw more acreage into production. Coffee prices have also surged 28 per cent as inelastic demand, coupled with Brazil's "off-year" pushed the global coffee market further into deficit. Similarly soybeans have surged almost 40 per cent, cotton prices have more than doubled, and wheat prices have elevated almost 70 per cent as the US market risks drawing down to the tightest stocks-to-usage ratio level since the 1970s. In January 2011, the United Nation's Food and Agriculture Organisation (FAO) Food Price Index rose for the seventh consecutive month to a record high of 231.0, topping its June 2008 peak of 224.1. The figures clearly show that the upward pressure on world food prices is not abating.
The truth is that all of these commodities, in some way or the other, form the basis for staple foods around the world. Not surprisingly, the reverberations of rising prices are widespread and are felt down the menu, feeding into the livestock sector and pushing meat and dairy prices higher. Substitute commodities such as rice and competing crops have also become more bullish, both on the supply side - as they battle for acreage to expand production, and on the demand side - as farmers switch to alternative feed options.
As the cost of poultry rearing and livestock goes up, so do the prices of eggs, chicken and other meat. The meat industry recently warned of a game-changer in pricing as the cost and contraction of corn supplies sends prices of beef, pork, and poultry up with the effects trickling down to the consumer. In addition, US cattle herds shrank by 1.6 per cent in January to 92.21 million, the smallest size since 1958 as ranchers experienced tough finances amid soft economies. Food producers and retailers including McDonald's Corp (NYSE: MCD), Kellogg Co (NYSE: K) and The Kroger Co (NYSE: KR) have begun to signal higher prices for consumers to offset the increased raw material prices.
As surging food and energy prices now pose severe economic, political, and social risks, central banks are now faced with a tricky question - How much further can food price inflation be ignored? Last Friday finance ministers from the Group of 20 leading economies (G20) met in Paris to discuss the food crisis against a backdrop of rising hunger and political instability in food-scarce countries in Africa, the Middle East and beyond. French President Nicolas Sarkozy put food security among the top objectives of France's G20 leadership, calling for greater investment in agriculture from both the public and private sectors to increase smallholder productivity. The fear of agflation risks has also triggered reactions from Governments that echo the events of three years ago. Just last summer, Russia sparked complaints of protectionism when it banned exports of wheat to secure the nation's supply. Likewise, the US agricultural community is already considering rationing corn as ethanol mandates cause supply concerns. However, as governments build up domestic stockpiles, impose export restrictions and subsidise food, global supplies tighten, triggering further price increases.
While some fear that inflation might be on a 1970s-style path and others that current price increases are masking a 1990s-style Japanese deflation and debt trap, central banks have their work cut out for them. If food prices in fact remain high, and if consumers spend less on other goods, other parts of the economy might suffer. One can therefore see how global food price pressures pose a significant threat that demands coordinated action by central banks. Left alone, we should fear that coordinated action may come in too little or too late as inflation "muffin-tops" are largely felt in emerging markets. Therefore, the associated policy prescription is hardly "one-size-fits all", but rather, widespread targeting of Consumer Price Index (CPI) inflation to mitigate monetary policy externalities on an international basis and help keep global inflationary pressures as "cool as cucumbers Read More... For the latest updates PRESS CTR + D or visit Stock Market news Today
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