Jan 7, 2011

Food Price Inflation - The Next New Global Theme

Suddenly, food price inflation has become the new global issue. From the New York Times, 5th January:

      U.N. Data Notes Sharp Rise in World Food Prices

      World food prices continued to rise sharply in December, bringing them close to the crisis levels that provoked shortages and riots in poor countries three years ago, according to newly released United Nations data.

      Prices are expected to remain high this year, prompting concern that the world may be approaching another crisis, although economists cautioned that many factors, like adequate stockpiles of key grains, could prevent a serious problem.

      The United Nations data measures commodity prices on the world export market. Those are generally far removed from supermarket prices in wealthy countries like the United States. In this country, food price inflation has been relatively tame, and prices are forecast to rise only 2 to 3 percent this year.

      But the situation is often different in poor countries that rely more heavily on imports. The food price index of the United Nations Food and Agriculture Organization rose 32 percent from June to December, according to the report published Wednesday. In December, the index was slightly higher than it was in June 2008, its previous peak. The index is not adjusted for inflation, however, making an exact comparison over time difficult.

      The global index was pushed up last year by rising prices for cooking oils, grains, sugar and meat, all of which could continue to remain high or rise.

      “We are at a very high level,” said Abdolreza Abbassian, an economist for the organization, which is based in Rome. “These levels in the previous episode led to problems and riots across the world.”
Here's a more Asian perspective, on the same matter.

      SINGAPORE - RECORD high food prices are moving to the top of the agenda for many Asian policymakers as the prospect of higher inflation in 2011 poses a major threat to the region's strong revival from the global financial crisis.

      The United Nations' food agency (FAO) said on Wednesday that food prices hit a record high last month, moving beyond the levels that prompted riots in 2008 in countries as far afield as Egypt, Cameroon and Haiti.

      Food inflation in many Asian countries, including China and India, is already in double digits, raising fears that the price pressures could spread more broadly to other sectors and pose a threat to both economic and social stability as millions of Asians live in poverty.

      Surging food prices have proved a trigger for social protests in the past, forcing governments to cave in to demands for action. They were a factor in the fall from power of Indonesia's long-term autocrat Suharto in 1998.

      'Food price inflation could really go into double digits across the region and rise to such an extent that it undermines the purchasing power of households and as a result then slows consumer demand and overall economic growth,' said Frederic Neumann, regional economist at HSBC in Hong Kong.

      'And that's a problem for Asian economic growth. But really it's also a problem for the rest of the world because as the Asian consumer increasingly is helping to stabilise world demand, it's actually a challenge of wider global significance.' Indeed, South Korean authorities sounded the alarm on Thursday over rising commodity prices. -- REUTERS

I just have a sneaky suspicion that one cause of the current food price inflation is increased activity by financial investors and speculators. It was just last month that my financial adviser was talking to me about investing in agricultural commodities.

Also, in the past few years, investment banks worldwide have been growing increasingly interested in the commodities business. As far as I'm aware, the bulk of their interest has been in metals such as copper, gold and steel. But really, if there's money to be made, they would just as well move into sugar, rice or corn.

In the end, it's all just money to the bank. Doesn't matter whether it's sugar or gold; rice or steel or widgets .... as long as it makes money.


Amused said...

With QEs all the rage among developed countries to bail out their failing economies, the money is now leaking into commodity market and creating real havoc (where lives are at stake.) Speaking of unintended consequences...

Anonymous said...

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I subscribe to the guy from australia and his FFT economic newsletter at http://www.forecastfortomorrow.com that guy has called many big events before they have happend, including the stock market crash in 2008 and the current financial collapse of the US. (currently happening) I found him from a friend last year, and he has some important work.

His oil calls are insane, and I have been making good money with them. He is well worth a look, if you want to keep two steps ahead of the sheeple out there.

I am worried about my financial future. Is anyone else nervous out there?

veii said...

Basically, it looks like there is this big bulge in the giant balloon called the "world economy". You squeeze the bulge in one place, and a new one emerges in another part of the balloon. So, when the dotcom frenzy was on, the money went there. Earlier, when East Asian economies were hot, the money washed into Thailand, Malaysia, Singapore and Indonesia. On both occasions, something happened and the bulge was squeezed in. The money men shifted the bulge elsewhere, but left an economic mess behind at the place that had been the darling just before. In many ways, Malaysia and Silicon Valley have not fully recovered from the aftershock of the squeeze. Heck, even Japan for that matter hasn't recovered from 1989. But the 'excess' money that caused all this carnage continues to float from one computer to another across the globe.

Anonymous said...

But no matter what, Singapore will still be peaceful and stable, right? Even though we don't produce a single grain.

Because we have lots of reserves (money) to buy all the food we need.

After all, as Mr Wang had rightly pointed out, it's all about money.

SG Girl Next Door said...

One of the causes of inflation is excessive printing of paper money.
This will increase demand of goods and drive up the prices of goods at the same time.

Fox said...

"One of the causes of inflation is excessive printing of paper money.
This will increase demand of goods and drive up the prices of goods at the same time."

That is probably not true in this case. The two are correlated but it is usually the other way round. When demand goes up, you need to more money to pay for stuff. So, the banks issue more loans and the government issues more currency.

Note that when we had a recession in the late 90's in Singapore, prices went down and the total money supply correspondingly fell.

Food prices are bound to rise because of the increasing affluence of China. High food prices are not necessarily bad for countries that are net exporters, like the US, Vietnam and Brazil.

Anonymous said...

Food price inflation in Singapore seems larger than officially tagged. That is my personal opinion when doing marketing and eating at hawker centres.

The trend is that when they upgrade a hawker centre, the rental goes up and the hawkers take the cue and increase their prices.

Not by ten or twenty cents, but by 25% or more! Everyone benefits except the poor customers.

No wonder the Government, the renovation contractors, and the hawkers love upgrading!

Anonymous said...

Yes. World Governments should have taken action to stop hedge funds et al taking spots in essential commodities like oil, rice, wheat, sugar, cauing non-demand related price inflatrions, which do drive social unrest or worse consequences.

Nobody understood why oil price went well over USD100 2-3 years ago despite China using mostly coal and not oil in its economic bull run. It was the money flow.

I put my money into commodity companies just before Christmas. Because after anlaysing that excess money (trillions of) from US and Europe "save thyself" policies will flood world food markets when eyes are on stock, properties.

jamesneo said...

Anon January 7, 2011 3:02 PM, our reserves are very vulnerable as significant amount of them are in US dollars which over the next five years are expected to depreciate significantly( although rally in short term is not impossible).

Although i think that agriculture commodities are being flooded with hot money leading to food price increase, the effect is only short term except if a country suffers hyperinflation. The real rise in food inflation over the long term for the coming decade is probably due to supply and demand issues which are also affected by energy issues.

pockaroo said...

Yes, QE prints money and flood economies with massive liquidity. These money gets hot and goes round the world chasing just about anything for returns. Portuguese 10 year bonds went for 6.71% how is that for returns/yield?

Surely commodities have a speculative side of it, however when it comes to food, we all have to eat one way or another. Soft commodities like grains are also vulnerable to weather. In the case of Singapore, we import everything and hence part importing inflation along with it.

Expect smaller packaging and/or reduced portions together with price hikes from now on.