Despite a slight easing in April, the price of food in global commodity markets remains near historic highs. In the GCC, retail food prices continue to trend upwards. QNB Group notes that the global food crisis that began in 2007 may be far from over.
Global food prices, as measured by the UN Food and Agricultural Organisation (FAO) were relatively stable in 1990-2005. The peak and trough during this period only differed from average prices by about 15%. Moreover, in real terms, food prices in 2005 were about 50% lower than they had been in 1975, as a result of increased productivity and trade.
By 2007, however, a new trend emerged in the development of global food prices. Prices shot up by 25% that year, and by the time they reached their peak in June 2008, they had nearly doubled compared to 2005.
The global financial crisis sparked a sharp correction in the autumn of 2008, bringing prices down a third. Then followed 18 months of gradual recovery until August 2010, when growth accelerated once again, bringing prices to a new record high in February 2011, 6% above the 2008 peak.
Prices eased by 10% during the rest of 2011, but had been on the rise again in 2012, until the small (1.4%) fall recorded last month—it is too early to tell is this is a blip or the beginning of a new downwards trend. The trajectory of price over the next year could have a significant impact on food security in many countries, and even political stability in some.
Numerous factors have contributed to the rise in food prices and their volatility over the last five years. These include demand factors, such as a growing global middle class that is able to afford more meat, and supply factors, such as droughts and floods. Two other factors are of particular interest.
Firstly, the conversion of crops to biofuels has reduced the supply for food. Over a third of the maize crop in the US (which produces 40% of the global harvest) is now used for ethanol production, up from just 6% in 2000. This happened as a result of energy security policies which required ethanol to be blended with gasoline—it now provides around 10% of US fuel—and provided farmers with large subsidies.
Maize is the largest of the world’s cereal crops, equivalent to around a third of the 2.5 billion tonnes of cereal grown each year. As well as being eaten directly, is also used for cooking oil and as livestock feed. As a result, a reduction in maize supply can influence prices across four of the food categories underlying the FAO index: grains, edible oils, meat and dairy; the fifth category is sugar.
The second factor is speculation in commodity futures. Market deregulation since the 1990s has enabled speculators to take much larger positions in many commodities. The equity market crashes in 2000 and 2008 encouraged investors to diversify into other asset classes. Commodities, including food, have become a popular destination for this money as they are seen as having relatively low correlation with other assets. Excess liquidity resulting from low interest rates and, more recently, from quantitative easing, also increased the pool of money going into commodity index funds.
Economists have differed considerably on their interpretation of the significant of these and other factors on food prices. One recent econometric model from the New England Complex Systems Institute found that increased ethanol production could closely explain the longer-term trend increase in prices, while speculative flows explained the recent volatility. This broadly fits with conclusions from a number of studies from the World Bank.
The analysis is compelling, although the debate will continue and it is likely that the price rise was more multi-causal. However, QNB Group notes that the significance of these two factors is that they are closely linked to government policy. Therefore, they could be somewhat managed, unlike weather events and food consumption preferences, to mitigate future food crises.
If food prices remain near the current high levels, or even spike for a third time in 2013, then this could create substantial hardship in poorer countries and lead to unrest.
The end of a long-standing US subsidy on ethanol this year may play a positive role in avoiding another spike, and the Economist Intelligence Unit forecasts a decline in maize prices. But conversely, high crude oil prices should support the demand for biofuels.
A fall in global food commodity prices does not necessarily translate into lower retail prices for consumers. Much of the food they purchase, particularly in wealthier countries, is highly processed, so the global commodity price only represents one component of the final retail price. Also price controls and subsidies can create a lag between global and national price rises.
In the GCC as a whole, food (combined with beverages) makes up 20% of the weighted average basket of goods and services that determine consumer price inflation. Its importance ranges from 13% in Qatar to 30% in Oman, reflecting differing patterns of household consumption, subsidies and price controls.
GCC food retail prices have risen every year over the past decade. Stabilising factors mean that, although their trajectory broadly follows the underlying trend in global prices, there is less volatility. Therefore, although they spiked by 15% in 2008, they did not fall back in 2009, but merely grew at a slower rate. The growth rate picked up again in 2010-11 and QNB Group forecasts 4.1% food inflation in 2012.
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