Food crisis could boom for farmersFont Size: Decrease Increase Print Page: Print Asa Wahlquist, Rural writer | April 26, 2008 THE global food crisis has been described as a silent tsunami. It has rolled over the world rice trade, lifted the Australian CPI on a rising tide and sent shudders through US futures markets.
The World Food Program says the food crisis threatens to leave more than 100 million people hungry.
In Australia, CPI figures released this week revealed food prices were rising above the level of inflation.
According to the ABS, in the March quarter, food rose 2.1 per cent, while overall inflation rose by 1.3 per cent. On an annual basis, food prices rose by 5.7 per cent and overall inflation increased by 4.2 per cent.
Anzac Day is when farmers traditionally like their autumn rain to start falling: and the good news is that good conditions could result in a grain boom like no other.
In Washington this week, the Commodity Futures Trading Commission, troubled by the unprecedented volatility on the futures markets, met at an Agricultural Markets Roundtable.
Between 1980 and last year, wheat price volatility has ranged between 15 and 32 per cent. Just three months into 2008, volatility doubled to 60.4 per cent.
The acting chairman of the commission, Walt Lukken, told the roundtable: "Commodity prices across the board are at levels not experienced in many of our lifetimes. In the last three months, the agricultural staples of wheat, corn, soybeans, rice and oats have hit all time highs.
"During the last year, the price of corn has increased by 118 per cent, wheat by 95 per cent, soybeans by 88 per cent, corn by 66 per cent and cotton and oats by 47 per cent."
The recent food spikes might have caught the markets, governments and bureaucrats by surprise, but the remarkable Beth Woods has been warning that it would happen for years.
Woods is the chair of the board of trustees the International Rice Research Institute, a senior manager within the Queensland Department of Primary Industries and professor of Agribusiness at the University of Queensland.
"What has happened is that across the board in the commodity food products, we have been eating slightly more than we have been producing for around seven years now. That has been driven by things like rapid economic development in the BRIC (Brazil, Russia, India and China) countries and the shift in a lot of Asian cultures from a middle class that mainly eats rice with small quantities of other things to a rapid increase in consumption of animal products."
She says that as that trend was reaching a tipping point, "suddenly a number of developing countries mandated the use of biofuels".
Woods says her warnings fell on deaf ears. She says one of the problems is that stocks have to be very low before prices rise, "so you don't get the signal that you need to increase production".
She thinks agriculture is about to enjoy a much higher profile, for two reasons.
One is what is being termed agflation -- the price of food is rising faster than the price of the other basket of commodities that go into driving inflation.
The other is that, in terms of potential growth in value of exports, we are looking at a really promising outlook for agriculture in the next 10 years," she says.
Bill Cordingly is the head of food and agribusiness research with the international food and agribusiness specialists, Rabobank.
He says the 5.7 per cent rise in food costs is significant, "when you see historically food prices have trended lower, and below inflation, because of technology and a whole range of factors".
He points out the raw commodity is often a small part of the cost of a final product, and that virtually every stage of production -- transport, labour, energy and packaging -- is under pressure from rising costs.
The rise is uneven: over the past year in Australia, milk rose 11.4 per cent, cheese 15 per cent, bread 9 per cent, poultry 11.6 per cent and vegetables were up 9.7 per cent.
It is perhaps a small consolation that the lowest rise occurred in wine, up a mere 1.7 per cent, below the inflation level.
Cordingly thinks higher commodity prices are in the process of being passed on to consumers, "because the upward pressure on prices has been there for a while, and can no longer be hidden in the supply chain. At the moment the farmer internationally has the whip hand because of supply and demand fundamentals, so inevitably you are going to see it pass back down to the consumer".
In fact, Australians have been protected from the worst of agflation for several reasons: the high Australian dollar, the abundant domestic production, and the comparatively small part of the Australian budget allocated to food.
The Westpac-NFF commodity indicator is 25 per cent above March last year, in Australian dollars, but it is 46 per cent higher in US dollar terms.
Food accounts for 15.44 per cent of household expenditure in the CPI, and that includes 4.56 for meals eaten out, and take away.
In countries such as Vietnam and the Philippines, around 50 per cent of income is spent on food, while in most of Africa the percentage is even higher.
"I don't think anyone would be happy about food prices going up strongly, but it is a relative thing," Cordingly says, adding "we are in a very privileged position in terms of our food security".
Cordingly also thinks we should have seen it coming.
"At the start of this decade we had the huge hard-commodity boom being driven by these same factors. And if we were awake to it, we would have realised that eventually this economic activity would continue to grow and as a result people would be lifted up the economic scale much quicker, and as a result will demand higher-calorie diets, and they have to come from somewhere."
He says the outlook for Australian farmers is good -- providing there is rain.
Cordingly, who in February forecast 2008 could be a year to remember, says: "We will know over the next month or so whether that is going to be the case."
This year, 2008, could also be the year when the grain futures market run by the ASX will hit its straps. Anthony Collins, general manager of emerging markets with the ASX, says the grain futures market has been going since 1996. "Up to this point it has really been a domestic market that we have serviced."
But from July 1, 2008, AWB will lose its monopoly, and the grain market will be deregulated.
In the US, there are worries about the role of index funds in the futures market, and the sudden withdrawal of investor funds from commodity markets as investor confidence fell.
But Collins argues: "A futures market by definition reflects the end supply and demand in the market.
"So while funds are in there, actively trading the market, they can't ultimately distort the price of the underlying commodity because that is going to be determined by the level of demand."
He is optimistic about growth of investor interest as the grains industry deregulates. "We expect the future volumes in Australia to pick up five or sixfold over the next few years.
"Every other continent has a grain futures exchange servicing the local domestic and export market and I don't think Australia is going to be any different," Collins says.
