Thursday, June 11, 2009

Concerns Mount Over Sharp Rise in Food Costs

The food shortages and price spike of last summer feels like a distant memory at this point, especially after the collapse in commodity prices over the winter. But.... They're baaaaa'aaack! Investor speculation, falling dollar, supply shortages, all conspiring to drive an up-spike again, and here we are at just the beginning of summer. From an article originally in the Financial Times:

After a year worrying 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 soybean, 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. 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.

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. “Agricultural markets are fairly nervous,” says an agricultural commodities analyst at Barclays Capital in London. “We are not in the comfortable food surplus environment of the 1980s and 1990s.” 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echoes a widely held view when he says that although the “headlines from the past year on the food crisis have been replaced by those on the economic crisis”, the “long-term challenge to produce enough food” has not disappeared.'

The price of soymeal – critical for fattening livestock such as chickens and hogs – has moved above $405 a ton, 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.

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 soy 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.”

The immediate concern is soy, 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. Soybean prices on Tuesday hit $12.45½ a bushel, a fresh nine-month high. Soy 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 fertilizer 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.

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