Inflation: It's Whats For Dinner
February 2011 looked to be the turning point for world policy makers. Back a little over a year ago, world food prices hit record highs and raging protests connected to the Arab Spring created a wave of civil unrest in the Middle East and north Africa.
The price of food later receded, but since of the start of 2012 food prices have begun ascending. The prices initially were seen as a pause in the overall downtrend, but after three months into the new year, the figures are persistent.
World food prices are likely to rise for a third successive month and could grow further beyond that. Expensive oil and chronically low stocks of some key grains have put food inflation on the minds of every economy around the globe.
From Reuters,
The United Nations Food and Agriculture Organisation (FAO) will update its monthly Food Price Index on Thursday and the organisation says prices could rise more in the short and medium term as grain supply tightens and energy prices stay high.
“You can see prices in the near term rising even further,” FAO's senior economist and grain analyst Abdolreza Abbassian.
The FAO index is what measures price changes for a basket of cereals, oilseeds, dairy products, meat and sugar. That index rose from February and January.
So what is contributing to these rising prices? For one, high crude oil prices have pushed the food inflation up since January. Consumer prices were up 2.6% in March from a year ago, in the 17 nations within the euro zone.
Energy prices have a strong affect on food prices as well, as they affect the production of fertilizers and costs related to food distribution and farm machinery use.
“The food price index has an extremely high correlation to oil prices and with oil prices up it's going to be difficult for food prices not to follow suit,” says commodity analyst Nick Higgins of Rabobank International.
Last week concerns about global grain supplies fueled a rally in the U.S. and European grain futures, all based off of a U.S. government report that showed lower than expected estimates of grain stocks. The report also showed a dip in soybean and wheat plantings.
The two major drivers of world grain markets at the moment will be corn and soybeans as the waiting game for new crops are harvested with strong prices swings caused by weather changes in major producing countries.
In March, U.S. soybean futures rose about 7% and gained around 17% in the first quarter of this year. The reason for the gains was based off of concerns about tight supplies as South America was hit with a drought and U.S. plantings were much smaller than expected.
The FAO believes prices could still fall in the second half of this year. With new crops, market tension could easy and drive full-year average prices below record levels of 2011. But that is only speculative. Right now it looks as though we're headed for a fourth consecutive month of higher food prices.
