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Manufacturing News

TECH FLASH

Agflation to drive food prices up 15 percent

Wheat--a staple grain
October 5, 2012

Wheat--a staple grainSkyrocketing agricultural commodity prices are causing the world to re-enter a period of “agflation” with food prices forecast to reach record highs in 2013 and continue to rise well into the third quarter of 2013, says a new report, Agflation, from Rabobank’s Food & Agribusiness Research and Advisory group.

“The impact on the poorest consumers should be reduced this time around, as purchasers are able to switch consumption from animal protein back towards staple grains like rice and wheat,” says Luke Chandler, global head of agri commodity markets research at Rabobank. “These commodities are currently 30 percent cheaper than their 2008 peaks. Nonetheless, price rises are likely to stall the long-term trend towards higher-protein diets in Asia, the Middle East and North Africa. In developed economies—especially the US and Europe—where meat and corn price elasticity is low, the ‘knock-on effect’ of high grain prices will be felt for some time to come.”

Due to the long production cycles of the animal protein and dairy industries, the effects of grains shortages will be more sustained because herds (especially cattle) take longer to rebuild, maintaining upward pressure on food prices. However, food makes up a smaller proportion of budget expenditures in such countries, so the current period of agflation should not lead to the unrest witnessed in response to the 2008 shortages.

The report estimates the Food and Agricultural Organization (FAO) Food Price Index will rise by 15 percent by the end of June 2013. For demand rationing to take place, thus encouraging a supply response, prices will need to stay high. As such, Rabobank expects prices—particularly for grains and oilseeds—to remain at elevated levels for at least the next 12 months.

While the impact of higher food prices should be reduced by favorable macroeconomic fundamentals (e.g., low growth, lower oil prices, weak consumer confidence and a depreciated US dollar), interventionist government policies could exacerbate the issue. Stockpiling and export bans are a distinct possibility in 2012/13, as governments seek to protect domestic consumers from increasing food prices. Increased government intervention will likely encourage further increases in world commodity and food prices, according to the study.

Rabobank expects localized efforts to increase stockpiles will prove counterproductive at the global level, with those countries least able to pay higher prices likely to see greater moves in domestic food price inflation. This is a vicious circle, with governments committing to domestic stockpiling and other interventionist measures earlier than usual—recognizing the risk of being left out as exportable stocks decline further.

In addition, the study warns that global food stocks have not been replenished since 2008, leaving the market without a buffer to adverse growing conditions. Efforts by governments to rebuild stocks are likely to add to food prices and take supplies off the market at a time when they are most needed.

For more information on the Rabobank Group report, Agflation, visit the Rabobank’s website.

KEYWORDS: consumer trends farms legislation

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