WORLD FOOD
Nominal Commodity Prices to Remain Above Average Levels
crop shortfall. But many of the similarities end there. The world market is much better buffered in terms of coping with regional deficits. The world economy is still in a delicate state and with austerity packages and post- recession jobless rates still high, retailers will find it hard to pass on these costs. This should prevent food prices spiralling higher the same way they did after 2007. Also, grain inventories are much more comfortable. Rice supplies too are higher. However, with oil prices on the
Sources: OECD and FAO Secretariats
related to climate change. Another factor affecting food
production, and hence prices, is the return of some plant diseases once thought to have been conquered, such as a fungal disease that affects wheat, known as wheat stem rust. Scientists in the 1950s and 1960s were able through plant-breeding experiments to produce wheat varieties resistant to the disease. However, a new strain of the rust called UG99 was discovered in wheat in Uganda in 1999. Speculation in food by big financial
operators has also had a significant impact on food prices. “There is no doubt that speculative activities have brought into the market a great deal of volatility,” the FAO state, but downplay the affects of speculators in pushing food prices to the recent record levels. However, a recent report by the
World Development Movement (WDM), “Betting on Hunger”, indicts food speculators for recent food price spikes. “In 2007-8, there was a huge rise in food prices fuelled by financial speculation … the price of wheat shot up dramatically by 80% and maize by 90%.” The FAO predicts that in the next decade food prices will be higher and more volatile than in the decade leading up to 2008 – the last time that the world suffered ‘agflation’ when, similar to now, droughts in key wheat exporting areas led to a serious
72 December 2010
increase again (affecting fertiliser costs) and the US dollar on a
weaker trend, the scope for further price increases remains intact. Despite initial signs of food price inflation, overall headline inflationary pressures are currently lower than in 2007/08, limiting the severity of any new agflation event.
Speculators to Blame? Food prices have trended higher and have been more volatile
since 2003, suggesting that food production has been insufficient to match rising levels of demand over the medium-term. Reflecting this trend, the UN Food Price Index hit a 27 month high in October. This has sparked debate about a re-run of the 2007-08 food crisis. Surging food prices and volatility can largely be explained by
market speculators according to many, with fast action needed to curb price volatility and tackle related phenomena like land- grabbing As a result of higher rises, countries from the Middle East, China and elsewhere are investing heavily in farmland in places like Africa to secure supplies. According to the World Bank, 45 million hectares were negotiated in 2009 – up from four million between 2006-2008 (see Commodities Now, September 2010). What can be done to curb food price volatility? As speculators
thrive on uncertainty, one of the first things to do could be to provide more transparency about existing stocks. If countries could agree to share information on the stock levels they hold – many countries have strategic reserves – that would be a start. Greater visibility of operations on the derivatives markets would also help in determining if speculators are largely to blame for unfair price increases – a direction that the US and EU are moving in, albeit slowly.
Trends, Themes & Implications ETF Securities recently published a report on the significant
price movements agricultural products have experienced recently. The report looks at investment trends, themes and potential implications for the agriculture industry. Specifically, the report focuses on corn, wheat, cocoa, soybeans, sugar, coffee and cotton.
“A wide range of agricultural prices have recently hit
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