Monday May 12, 2008 Higher food prices trend to go on into 2009
Kuwait Finance House, in its Global Agriculture Report, says it expects the rise in food prices to continue and the fight to feed people and livestock to intensify. We present here an abridged version of the report.
IN recent months, agriculture commodities have posted their biggest monthly gains since the 1970s oil crisis. The rise in international prices, which has been building up in recent years, gathered pace in 2007 and looks set to surge higher this year on the back of a continuation of tight supplies, higher crude oil prices (which is adding fuel to the biofuel proposition worldwide), adverse weather in major planting regions and the unrestrained consumption boom in major emerging economies.
Global food prices have increased by 83% in the last three years, according to the World Bank. The high international prices for food crops are cascading through the food supply chain, contributing to the rise in the retail prices of basic food items.
World Bank estimates that 100 million people could be pushed deeper into poverty given the current food crisis, particularly in Africa. Compounding the current situation is the fact that the price gains are being driven higher by the psychological factor as well as export restrictions by major grain and crop producing countries.
We do not see the rise in food prices globally as a temporary phenomenon. Rather, the problems are structural in nature and thus we expect the trend towards higher food prices to continue well into 2009.
While the World Bank expects prices to stabilise after 2009 as supply and demand respond to the high prices, prices are expected to remain above 2004 levels up to 2015 for most food crops. The battle to feed people, livestock and run engines is only expected to intensify against a backdrop of increasing upward pressure on limited land and water resources.
Factors contributing to high prices
As it is, the inventory-to-consumption ratios for agriculture commodities are at close to multi-decade lows and very likely to remain this way over the medium term.
The factors that are contributing to the rise in prices globally include a tight supply situation caused by the diversion of crops into biofuel production, adverse weather conditions that have affected crop production in parts of the world and a decline in arable land owing to rapid urbanisation and rise in infrastructure development.
On the demand side, rapid economic growth in huge emerging markets has caused their populations to rise from destitution, a factor that has contributed to markedly improved diets and which is leading to higher demand for food, particularly meat.
The dramatic rise in agriculture prices, however, has more to do with the shift towards biofuels to counter the effects of spiralling crude oil prices. Indeed, surging crude oil prices and the resultant concerns about energy security, has added fuel to the biofuel proposition worldwide.
Concerns over oil prices, energy security and climate change have prompted governments to take a more proactive stance towards encouraging production and use of bio-fuels.
This has led to increased demand for bio-fuel feedstock such corn and palm oil, and increased competition for cropland. Almost all of the increase in global corn production from 2004 to 2007 went towards bio-fuel production in the US.
In addition, the United Nations estimates that the world’s population will reach 9.5 billion people by 2050, a growth of 55% from 2000. Over the next two decades, the world’s population is expected to grow on average by more than 100 million people a year.
More than 95% of that increase will occur in the developing countries, where pressure on land and water is already intense.
A key challenge facing the international community is, therefore, to ensure food security for present and future generations.
As the United Nations’ Food and Agriculture Organisation (FAO) notes, the world has rarely felt “such a widespread and commonly shared concern about food price inflation, a fear which is fuelling debates about the future direction of agricultural commodity prices in importing as well as exporting countries, be they rich or poor.”
Links with global financial sector
High price events are not rare occurrences in agriculture markets. What is different this time around is the concurrence of the hike in world prices of not just a selected few, but of nearly all, major food and feed commodities. It is this occurrence that has sparked a global food crisis.
That the current high price event has followed closely on the heels of the US sub-prime crisis that has resulted in a meltdown of global financial markets is no coincidence. The linkages between commodities and the financial sector have increased in recent years as investors are increasingly turning to the former to seek opportunities in portfolio diversification and a reduction in their risk exposures.
Global commodities, in general, have outperformed this year, compared with bonds and equities, which have seen close to zero or even negative returns in the case of equities. It is estimated that global investments in commodities rose by more than 20% in the first quarter of 2008 to US$400bil.
Feeding the biofuel industry
Soaring crude oil prices have also contributed to the increase in the prices of most agriculture commodities owing to a rise in input costs and also by boosting demand for crops used as feedstock for the production of biofuel.
In the oilseeds market, for instance, commodities like corn and palm oil are benefiting from their growing industrial usage as countries around the world accelerate their biofuel programmes. We expect extensive policy initiatives worldwide to lead to an increase in demand for selected agriculture commodities like corn and palm oil, hence affecting their prices and international trade flows.
The increased demand is expected to affect the balance in other commodity markets as farmers divert cropland to exploit gains from producing biofuel crops.
Worldwide, the total food import bill rose 21.2% year-on-year to US$744.8bil in 2007 largely on the back of higher commodity prices. Countries are reacting to the price increases by slowing their purchases.
The United Nations has stated that the global food crisis, which has been building up for years, has reached emergency proportions.
The World Bank has warned that as many as 33 countries may face social unrest in the coming months on the back of escalating food and energy costs. Households in poorer countries are expected to shoulder the biggest burden of the food crisis as they spend a larger share of their income on food compared with those in richer nations.
According to the US Department of Agriculture, this will magnify the impact of costlier food crops. The rise in international food prices is causing households in lesser-developed countries to spend between 50% and 70% of their wages on food currently, compared with about 30% to 40% last year.
In the US, households spent on average 6% of their income on food last year. In many instances, government initiatives to subsidise the price of food are not having the desired effect as the current situation is being exploited by traders selling government-subsidised food on the lucrative black market.
