Food price inflation is hard to stomach Sun 3 Jun 2007
IN THE clearest sign yet that we have a food price problem, there is now a strawberry crisis. Prices are rising because there is a shortage of strawberry pickers. The EU migrants of recent years are staying at home as Eastern European wages have surged.
But the strawberry crisis is dwarfed by the Chinese pig crisis. China is currently suffering from a disease that has killed millions of pigs. The price of pork, the country's most important source of affordable meat, has risen by as much as 30% in Chinese cities over the past week. Advert for The Scotsman Digital Archive
Why should these crises matter? Because they are part of a growing problem faced by governments across the globe: a persistent and continuing rise in food prices.
And why should this matter? Because global inflation is being exacerbated by efforts to combat climate change and global warming. Central banks are now fighting to hold back inflation worldwide with rises in interest rates. The problem is that while higher rates may inflict a lot of pain on other sectors of economic activity, they have a limited effect on food prices. The world, after all, has to eat.
Climate change is the big issue at this year's summit of the Group of Eight (G8) of leading nations in Germany this week. Governments and corporate giants have been clambering aboard the great climate change bandwagon as it gathers pace. No one wants to be left behind. But one of the effects may be even higher prices for food, fuelling the very inflation that G8 central bankers have been trying to curb. So where, and how, does this all end?
Rising food prices have brought forth a new term in global economics: "agflation". And it is the behaviour of global food prices - an inflation none of us can avoid - that could come to rival global warming itself as one of the biggest problems on the planet.
"Given expanding constraints on food supply," wrote Merrill Lynch analyst Jose Rasco in a paper last month, "the changing demand for food and the entrance of the energy business as mass consumers of food products, it is not surprising to see food prices putting upward pressure on overall inflation."
Food input prices are now putting more upward pressure on producer inflation than at any time since the early 1980s. "I am surprised there are still so few people worrying about global inflation," wrote ABN AMRO economist Tim Drayson last week. "The latest inflation infestation is appearing in soft commodities. A wide range of basic foodstuffs have risen in price."
Between March 2005 and March this year, the price of US wheat rose 34%. Corn rose by 47.4%. Barley is up by 59.4% and cattle by 41%.
And, says John Parker, a food analyst at Deutsche Bank: "There is growing concern within the food industry that the present upswing in soft commodity prices is structural rather than cyclical." Put another way, that means permanent instead of temporary.
This is working through to the retail level around the world. For example, in the US, food prices in the first three months of this year rose at an annualised rate of 7.3%. Pressure on food manufacturers has been intense. US chocolate giant Hershey cut its 2007 profit forecasts last month because of rising milk prices, while Nestle has told investors that it will "not be able to cope with higher milk costs simply by raising prices".
In Britain, food price inflation is now running at around 6%, more than double the rate of the official CPI measure and the highest rate of increase for some six years. Food items account for some 10% of the CPI inflation 'basket'. What is worrying for members of the MPC is that between 1998 and 2005 food items in the CPI basket were recording lower than average inflation - an annual rate of increase of less than 0.1% a year. This had the effect, inter alia, of absorbing higher inflation in other areas. Today, food prices, far from acting as a shock absorber, are running well ahead of the basket average.
The policy dilemma is obvious, as widely expected further rises in interest rates will only have a limited effect in controlling prices that have been rising globally.
Rising energy prices have also contributed to the sharp increase in prices for grain and sugar. Corn output has been diverted towards ethanol production as an energy substitute. Planting of corn has now increased in the US. But this, as ABN AMRO's Drayson points out, is reducing the availability of other grains, such as wheat.
Second, these crops require fertilisation and transportation. Both rely heavily on hydrocarbons.
UK food inflation was a key factor in the recent spike of CPI inflation above 3% in April. The puzzle for analysts is why UK food prices appear to have been rising faster than elsewhere - and this despite the rise in sterling against most other currencies. One reason may be a drive by the food manufacturing and distribution industry to drive up prices higher in order to rebuild profit margins that have been eroded for the past 18 months.
And Britain may turn out to have got off lightly in the longer term. In the world's two most populous countries, China and India, food accounts for 33% and 45% of their consumer price indices respectively. Put crudely, the bigger the proportion of the population on lower incomes, the greater the hit from food price inflation on those households and the greater the potential for unrest.
The International Monetary Fund has already drawn attention to how the biofuels boom is causing corn and soyabean prices to start moving in tandem with crude oil prices - the latter up 30% since the start of the year. "Rising demand for biofuels", it warns, "will likely cause the prices of corn and soyabean oil to rise further and to move more closely with the price of crude oil, as has been the case with sugar."
Global warming, the growth in biofuels, the pressure on cereal prices, higher inflation, higher interest rates, but still a dramatic growth in biofuels as governments seek to meet their Kyoto emission targets: there is no easy way out of this vicious circle other than allowing cereal prices and those of other food raw materials to rise, encouraging farmers to grow more stock and thus increase supply.
Farmers need the confidence to do this. But so far there is little evidence of this happening in the UK. Farmers point out that very little of the higher prices is filtering back to them. Consumers, however, may compel a quicker change as the pressure on the weekly food budget grows.
