Despite drought and high prices, food
scarcity is not yet likely
As the worst drought in a half century
persists in the U.S. Midwest crop region, prices for crops soar. Corn has
increased nearly 50 per cent in just six weeks, the price for soybeans for
August delivery rose steeply, and wheat prices reached the highest level since
the spring of 2008.
Not surprisingly, consumers are concerned
about food prices, and many dread looming hikes in coming months that will
especially penalize the poor. Looking at the overall commodity landscape,
however, there’s no call for panic, at least not yet.
Since 2008, when food scarcity in many
regions around the world prompted riots and demonstrations, people have become
sensitive to sudden increases in commodity prices.
Despite this, the proverbial “new normal,”
which suggests more market volatility and abrupt market swings, is still not
engrained in our collective thought processes. Beyond the distressing headlines
and alarmist sound bites lies reassuring factors that we need to keep in mind.
First, the FAO (the United Nation’s Food and
Agriculture Organization) recently mentioned in its latest assessment that the
overall supply and demand situation in 2012-13 remains adequate.
Its 2012 food price index is actually down
compared to the same time in 2011. The FAO also made the point that an abundant
supply of rice, a key strategic food staple for almost half the world’s
population, will assure food security for the most populous regions. Enough
wheat and other grains remain available for export as well.
Second, world agriculture is more productive
than ever, thanks to improving technology and genetic know-how. World cereal
production is expected to hit another new record this year of 2.4 billion
tonnes, which is approximately 2 per cent higher than last year’s record high.
Many farmers have access to more arable land
as they are using better fertilizers to increase yields.
One factor that played a significant role in
the 2008 riots was the cost of energy, a significant input cost driver for food
processors, packaging and distribution. The price of a barrel this year is
nowhere near 2008 record levels, and the Bank of Canada predicts a lower price
for oil in weeks to come. For this year, energy costs are a non-factor. Even
though the drought may be driving prices upward, lower gas prices are in
contrast affecting prices downward to a greater degree.
Last, the slower than expected global
economic recovery will also impact food prices over the next few months. Based
on recent reports, both emerging markets and industrialized economies are now
affected by economic uncertainties. Food distributors and retailers are astute
market analysts, as they closely monitor consumers’ capacity to pay for food.
Since many food categories have many substitutes, they are likely to charge
what consumers are able to afford in any given markets. Again, the situation is
very different than in 2008 when the global economy was more robust.
What is driving commodity prices upwards is
speculation; too much, that is. Speculation is obviously nothing new to
markets. However, excessive speculation in derivative markets has enhanced the
rate of price swings in recent years.
Agriculture has recently attracted what many
call “price manipulators” — hoarders and influential speculators who are attracted
to commodities, as they are believed to move in an opposite direction to equity
markets, thereby providing a hedge against inflation. As a result, regular
traders are not able to hedge their risk, and farmers are not getting benefits
of price rise, while manipulators cash in. Regrettably, therein lays the real
story behind current soaring prices.
The “new normal” in agriculture calls for a
regulated global framework that would put price manipulators in check. The
U.S., the EU and India, for example. are changing regulations, but change is
not coming fast enough, and it needs to.
Dr. Sylvain Charlebois is associate dean,
College of Management and Economics, University of Guelph
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