Concerns mount over sharp rise in food costsBy Javier Blas in LondonPublished:
June 9 2009 17:22 | Last updated: June 9 2009 23:24
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about the piggy bank, the world economy is turning its attention to the
cupboard. Almost
unnoticed, agricultural commodities prices have returned to levels last
seen at the start of the 2007-2008 food crisis, prompting concerns
about a fresh rise in food costs. The increase in soyabean,
corn and wheat prices – to their highest level in eight to nine months
and up more than 50 per cent from their December lows – comes on the
back of strong Chinese demand, a forecast of lower supply due to
reduced planting, and the impact of a drought in Latin America. Argentina’s
crops have been devastated.
“Agricultural
markets are fairly nervous,” says Sudakshina Unnikrishnan, an
agricultural commodities analyst at Barclays Capital in London. “We are not in
the comfortable food surplus environment of the 1980s and 1990s.”
The price of soyameal – critical for fattening livestock such as
chickens and hogs – has moved above $405 a tonne, a level only seen for
a brief period in 1973 and during four weeks at the peak of last year’s
crisis. The rise has pushed the price of ready-to-cook chicken in the US to the
highest in a decade.Traders
say hedge funds and other big institutional investors, including
sovereign wealth funds from the Middle East, have poured money into the
agricultural market, helping to drive commodities prices higher as the
US dollar weakens.A repetition of last year’s food crisis, when sharply rising
prices sparked rioting in some countries, seems unlikely, however. Even after
their surge, soya, wheat and corn prices are well below last year’s peaks. Rice
is trading about $550 a tonne, well below its peak last year of more than
$1,000 a tonne.Beef, pork and milk prices remain depressed, further capping the
potential for a rise in overall food costs,. The
United Nations’ Food and Agriculture Organisation is relatively
optimistic, saying that “barring major crop setbacks ... the food
economy looks less vulnerable” to a price spike. “In spite of
strong gains in recent weeks, international prices of most agricultural
commodities have fallen in 2009 from their 2008 heights, an indication
that many markets are slowly returning into balance,” it says.But private
sector analysts and industry executives are less relaxed. In
rare public comments, Christopher Mahoney, a director at Glencore
Grain, the secretive trading house based in Rotterdam, warned last week
that supplies of some agricultural commodities such as corn and soya
were “pretty tight”. Lewis Hagedorn, an agricultural
commodities analysts at JPMorgan in New York, describes the situation
as one of anxiety but not yet alarm. “We are approaching a
level of concern with respect to inventories in some areas, although we
are not presently in a crisis mode. We are not well prepared from a
supply and demand balance sheet perspective to absorb any
weather-related surprise.”Food companies are taking
precautionary measures, building positions in the commodities futures
market to hedge against further price rises, says Luke Chandler,
director of agricultural commodity markets research at Rabobank in
London. “There is a lot more attention among food companies, particularly after
the pain experienced last season,” Mr Chandler says. The immediate concern is
soya, both because of its use as food but even more as livestock feed. Strong
Chinese consumption, as the country’s diet moves from vegetables to
meat, and the crop failure in Argentina, the world’s third largest
exporter, have created extraordinary pressure on US supplies, sending
inventories down to the lowest level in 40 years.Soyabean prices
on Tuesday hit $12.45½ a bushel, a fresh nine-month high. Soya is
trading at the level of April 2008, after rising almost 60 per cent
from its December’s low. Soya is, nonetheless, still below last year’s record
of $16.5 a bushel.Looking
at the 2009-10 season, analysts fear a drop in cereals production, in
corn and, to a lesser extent, in wheat, as farmers cut their planted
acreage in response to low prices last autumn, higher cost for inputs
such as fertiliser and pesticides, and difficulties securing finance in
some countries. Production in countries such as Ukraine and Brazil is down
because farmers did not have access to credit.The
International Grain Council, an inter-governmental organisation,
forecast that global grains supplies would fall in the 2009-10 season,
which starts at the end of the month, to 1,721m tonnes, down 3.4 per
cent from 1,782m tonnes in 2008-09. “World grains production is
expected to fall short of use in 2009-10, eroding some of the gains in
stocks achieved after the bumper 2008 harvests,” the IGC said in its
latest monthly report, forecasting a drop in stocks to 328m tonnes,
down 4.3 per cent from 2008-09’s level of 343m tonnes. Global grains demand
will rise to 1,736m tonnes in 2009-10, up 0.8 per cent from 2008-09 season, the
IGC says. With
the US the world’s largest corn exporter and wet weather disrupting
planting in areas such as Illinois, Mr Mahoney of Glencore, says: “It
is essential that we have a good US growing season this year.”The combination
of worries is propelling cereal prices. Corn
is trading at the level of January 2008 at the start of the food crisis
– about $4.5 a bushel, but still well below last year’s record of $7.5
a bushel. Wheat is lagging behind, trading at the level of
October 2007 – at about $6.25 a bushel, still far below the 2008 peak
of $13 a bushel.Even if supply is set to drop this year, a large carry-over
from last season will cap any price rally.“The wheat supply-demand picture is
considerably less tight,” Mr Mahoney says. The
surge in prices is a reminder of how the world’s food security has
deteriorated, after years of comfortable surpluses, analysts and
executives say. Mike Mack, chief executive of Syngenta, one of
the largest manufacturers of chemicals for agriculture, echoes a widely
held view when he says that although the “headlines from the past year
on the food crisis have been replaced by those on the economic crisis”,
the “long-term challenge to produce enough food” has not disappeared.Copyright
The Financial Times Limited 2009
