High Agricultural Commodity Prices Likely to Persist

Evidence is mounting that the recent surge in agricultural commodity prices is not simply a cyclical event, but rather reflects structural changes that are likely to keep prices high for some time.

According to the International Monetary Fund, food prices have risen almost 50% since the end of 2006, and despite the slowing economic growth in many parts of the world, prices show no signs of easing. A recent article in the IMF’s Finance and Development magazine asserts that soaring commodity prices may have a lasting impact. The article attributes much of the recent increases to three factors:

• Population-led growth in demand from emerging countries, notably China, India and the Middle East.
• Increased use of some food crops for biofuels.
• Slow supply response to higher demand.

The World Bank agrees that the increase in food prices is not a temporary phenomenon, but is likely to persist in the medium term. “Food crop prices are expected to remain high in 2008 and 2009 and then begin to decline as supply and demand respond to high prices; however, they are likely to remain well above the 2004 levels through 2015 for most food crops,” the Bank said in a recent background note.

In a cover story, The Economist says the food crisis of 2008 has revealed market failures at every link of the food chain. “The surge in food prices has ended 30 years in which food was cheap, farming was subsidised in rich countries and international food markets were wildly distorted. Eventually, no doubt, farmers will respond to higher prices by growing more and a new equilibrium will be established. If all goes well, food will be affordable again without the subsidies, dumping and distortions of the earlier period. But at the moment, agriculture has been caught in limbo.”

The era of cheap food is over. The transition to a new equilibrium is proving costlier, more prolonged and much more painful than anyone had expected.

Oxford Analytica also sees the food crisis as a long-term shift.

A series of factors have re-awakened food insecurity — high energy costs, adverse weather, Asian prosperity, the switch to biofuels and speculation — most of which will continue to influence global food markets.

This structural change will disadvantage most the urban poor in food-importing countries, who already have shown that they are able to fuel political instability in expressing their grievances, OxAn says. “Political leaders should be able to take some positive steps to alleviate the situation, such as increasing targeted aid for the poor, investing in priority projects to boost agricultural productivity, dismantling restrictions on international trade in food, and reversing flawed policies on biofuels.”

OxAn says the carbon emission saving from a switch to biofuels is open to question. “Moreover, assuming a positive saving, the need for subsidy is questionable if oil prices do not fall”

Standard & Poor’s agrees that the cyclical paradigm may have permanently changed:

While there will undoubtedly always be periods of declining prices, they may not ever fall to the historic price averages for the different crops.

While continuing high prices may cause problems for consumers, S&P says it is good news for agribusiness firms such as ADM, Bunge, Ltd, Cargill, Inc, and Corn Products International. However, high feed prices will likely squeeze the margins of poultry producers such as Tyson Foods Inc. and Pilgrim’s Pride Corp., and integrated hog processors such as Smithfield Foods Inc. and Dean Foods, Ltd.

Meanwhile, the higher price of corn will mean soft drink companies including The Coca-Cola Co. and PepsiCo Inc. and their bottlers will continue to pay steep prices for the high fructose corn syrup [HFCS] they use, S&P says. “There’s no cost-effective alternative to HFCS as a sweetener in the U.S., and we may see some pass-through of these costs to consumers.”

The technical indicators also point to continuing high prices. An analysis of 60-year cycles by Michael Kahn of Barron’s forecasts a peak in about a year. “That suggests that there is more upside for commodities,” Kahn says.

Comments

[ShanghaiAdvisor]

It is a myth that farmers can just "plant more acres". In many parts of the world, there is no more acreage to just "plant more". Planting more acres upon whim is only feasible in developed countries so there is soon to be reached a maximum plantable acreage. This will arrive much sooner than "peak oil". I call this phenomenon "peak food". This will be here within 5 years and prices will go up at least 2 fold from here as the world middle class population surges. May God bless us all.

[Silver-Bullet]

Maybe we will start growing our food upwards (ie vertically) and in controlled conditions.

Is there an ETF or stock for hydroponics?