Food Price Rise Suggests Long-Term Supply-Demand Mismatch

The Economist wonders why food prices are rising during a recession. “Between December and mid-June, the food index rebounded by a third, even though this year’s total cereals crop is expected to be another bumper (2.2 billion tonnes, says the Food and Agriculture Organisation, second only to 2008/09). Meanwhile, soyabean and sugar prices have risen by nearly half from trough to peak—see chart below—and the index of “non-food agriculturals” (plants such as cotton or rubber) also rose by a quarter between December and mid-June. Prices have been increasing at a time of plenty.”

The Economist says there are two clusters of explanation: cyclical factors—features of the farm cycle and world economy that fluctuate from season to season—and secular, long-term factors.

“On the face of things, markets last year were adjusting exactly as economic theory predicts they should: prices rose, drawing investment into farms; supplies then rose sharply, pushing prices down. But that was not the whole story.”

“The price fluctuations of 2007-09 suggested that uncertainty in the world of agriculture was deepening under the influence both of oil prices and capital flows.”

The fact that prices are still well above their 2006 average, even in a recession, suggests that the spike of 2008 did not signal a mere bubble—but rather, a genuine mismatch of supply and demand.

“And this year’s price increase suggests that there is a long way to go before that underlying mismatch is eventually addressed.”

Comments

[Fighting Yoda:]

There has been speculative activity even in food, but all crops are pointing towards a bumper output mostly due to huge acerage under plantation and good weather - we should see declines.

Corn and wheat have shown steep declines recently, soy future are pointing to declines too.

Jul 02 05:37 PM

[DWStein:]

'prices rising during a recession', eh? Isn't there a catchy buzz-word for that? Stagflation?

The lesson from the 1970s, I thought, was that slow growth did not mean lower inflation. This punched a large hole in the Philips curve explanation for the causes of inflation.

It should not be surprising, therefore, that the general price level might be higher if the printing press is at 9000rpm; largely independent of the rate of GDP growth. As discussed elsewhere, it has come as a surprise to some that prices are not higher.

Given the magnitude of the recent market moves, I think the dust is still settling. i.e. i think longer term market averages are going to tell us more that the day to moves in the market.

Jul 02 07:20 PM

[derryl:]

The Economist author observed, “On the face of things, markets last year were adjusting exactly as economic theory predicts they should: prices rose, drawing investment into farms; supplies then rose sharply, pushing prices down. But that was not the whole story.”
“The price fluctuations of 2007-09 suggested that uncertainty in the world of agriculture was deepening under the influence both of oil prices and capital flows.”

"investment" going into farms means either farmers increase debt to increase their capital plant and production, or investors provide the money and want a rate of return. So add the debt service costs into the new cost structure of agriculture and their product price has to rise to maintain profitability.

Jul 03 01:18 AM