Record Food Prices. Global food prices reached record levels last month as the weather around the globe adversely impacted crops. High food prices have already sparked protests across the Middle East and North Africa. The trend in price data indicates that upward pressure on world food prices is not abating. The FAO Food Price index reached its highest level since records began in 1990, topping the peak of 224.1 set in June 2008.
Weather continues to play a large role in disrupting harvests around the globe. Harvests have been at record or near-record for the last two years for many commodities but grain stocks have not caught up with the growth in demand. The recent broad-based crop disappointments occurring in numerous countries means it will take years to rebuild a good supply buffer which would insure food prices remain moderate.
Panic buying and hoarding. Due to the recent unrest and protests many countries are substantially increasing grain imports and food subsidies. Bloomberg noted last month that “unrest is starting again” as a result of rising food prices. They report three people were killed and 420 injured in protests over milk and flour costs in Algeria. The Tunisian President tried to end a month of protests by promising lower prices for bread, milk and sugar, before leaving the country.
The Serbian government said it will consider an export duty on wheat to discourage shipments. South Korea said it plans to increase the supply of some food products to help control prices. And India halted onion exports in December after prices more than doubled in a year.
The Financial Times published an article last month entitled “Panic buying fears send crop prices higher”. Javier Blas, Financial Times Commodities Editor, noted:
First, the crop failures; second, the export restrictions; and third, the initial food riots on the back of rising prices. Now food importing nations are responding with a steep increase in purchases and hoarding, driving agricultural commodities prices even higher.
This latest development mirrors the 2007-08 food crisis, when the cost of agricultural commodities from wheat to corn hit all-time highs. At that time, the first three stages led finally to panic buying, which was the straw that broke the camel’s back.
As happened three years ago, the accelerated buying is coming from a broad spectrum of developing nations as governments react to growing social unrest about rising domestic food prices. . . The extra purchases are particularly large in North Africa and the Middle East, regions which are more dependent on international markets for food supplies.
Ethanol & Social Stability. The relationship of social stability and food prices is in part a function of how much of an individual’s income is utilized for food. In developing countries it is not unusual for food costs to constitute a third or half of an individual’s income. In North America food costs constitute around 10% of income. The Financial Times published charts on the major grains used to feed the world – rice and wheat are by far the largest crops on a calories per capita consumption basis:
With regard to corn, energy policies adopted in a number of countries have mandated or provided economic incentives to convert corn or sugar cane into ethanol, an alternative fuel. Almost 39% of last years U.S. crop was used for ethanol, and next year that percentage is expected to increase according to the USDA.
At the projected level of consumption year-ending corn stocks will total only 5.5 percent of consumption – the lowest level seen in decades.
Corn stocks cannot be reduced much below that level and still maintain a functioning grain pipeline of supply. Higher corn prices – possibly much higher prices – could play a role in allocating scare supply. (charts courtesy Wall Street Journal and Reuters)
La Nina. Adverse weather events account for many of the agricultural sector problems. The flooding in Australia as well as the droughts in South America and China have been blamed on ‘La Nina’ - an abnormal cooling of the waters in the equatorial Pacific Ocean.
The La Nina pattern ‘wreaks havoc’ with weather patterns across the Asia-Pacific region according to meteorologists. When the pattern is present the chance of drought in grain-growing areas of the U.S. increases substantially (see map below), something we will need to monitor in the upcoming planting season.
This winter China's key wheat growing province of Shandong is facing its worst drought in at least 40 years, attributed to the La Nina event, putting further pressure on politically sensitive food prices. China’s food prices have been surging for months. Dry weather and unseasonable temperatures are forecast in the region well into spring. In addition, Russia’s whet belt has not recovered from last year’s drought and yields are expected to suffer again during the coming growing season.
This La Nina pattern is unusual in that it is one of the most intense in the last fifty years according to weather experts. Many of the computer models have the pattern slowly breaking down over the next several months, although some experts predict that the pattern will last well into the fall of 2011 if not longer.
The map at right indicates areas and crops or commodities potentially impacted by the La Nina weather pattern, courtesy the Financial Times.
Investment Implications. From an investment standpoint we think the longer term price trends are very positive for both agriculture and energy sectors reflecting changing supply and demand fundamentals. These are not price ‘bubbles’ or short term disruptions – in our opinion they reflect longer term global trends which are creating significant investment opportunities.
