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Demand vs supply and food prices
Dennis Morrison
Wednesday, February 13, 2008
FOOD price inflation is becoming widespread and has raised concerns among policymakers in the leading economies as well as international institutions such as the World Bank. Traditional food surplus countries have not been immune, as can be seen from the fact that rising food prices are one of the main threats to inflation control in the USA, Canada and the European Union, among others. Indeed, only energy and oil prices specifically are thought to pose a greater inflation threat.
Dennis Morrison
As we in Jamaica well know, sharp increases in food prices are a destabilising factor in the economic environment, particularly because they place more pressure on the most vulnerable socio-economic groups. The rapid rises in the prices of food on global markets in recent times are therefore most unwelcome. Over the past 40-50 years we have, however, been accustomed to fluctuations in food prices as bumper crops, bad weather and crop failures put supply and demand out of balance. In other words, food prices fall sharply when output and inventories are on the rise, causing supply to run ahead of expectations.
But equally, prices escalate when supply drops and especially if inventories are declining without clear prospects for compensating expansion in output. That, after all, is what is happening in the global food markets at this time. The critical question though is, will supply constraints be eased any time soon? Available data suggest that these constraints are likely to get tighter in the immediate term. Just a few days ago, it was reported that global stocks of wheat are expected to fall to a 30-year low and US inventories are already at their lowest level for 60 years. Consequently, wheat prices are at record levels and the rate of increase is accelerating.
Except for weather-related fall in output, this outturn should not be surprising. For some time it has been evident that the growth in demand for food items like wheat has been outstripping the pace at which output has been increasing. This is especially obvious in the case of China and more recently in respect of India. China, having experienced solid expansion in agricultural production starting in the late 1970s and been able to be self-sufficient in food, has moved into a stage where because of spectacular growth in its economy it is now dependent on imports. By virtue of its massive population, even a moderate shift to imports results in significant additional demand pressure on world food stocks.
Last week alone, wheat prices in the USA increased by 10.7 per cent as the price surge reached 50 per cent since late 2007.
Sensing the intensification of supply pressures, major consuming countries such as India, the second largest wheat consumer, have been stepping up their importation of the commodity. The USA itself, which is the world's largest exporter, is said to have sold too much wheat and hence this is why its inventories have fallen so sharply. Favourable weather could, however, take some pressure off the markets by slowing down the drawdown in inventories.
An important effect of high wheat prices is that they will influence the decisions of US farmers in particular, about the allocation of land between different crops.
One of the other crops, soya bean, is also attracting record prices and together with wheat is expected to rank above corn in the planning decisions of US farmers about land use for the next crop period at least. In China and India, which are major wheat producers, government subsidies have kept prices in check and therefore it is less likely that land will be attracted away from crops such as cotton to expand wheat production. Hence, output will not be influenced by the price effect, even as their demand for wheat is projected to continue rising in line with the robust increases in the incomes of their populations.
While this outlook is worrying for import-dependent countries, it is, at the same time, an opportunity for the farming community. For too long, domestic food producers have had to struggle to survive competition from subsidised imports. They have also not been able to plan on a long-term basis since world food prices have usually remained low, but for short spikes related to crop failures. That situation appears to have shifted and may set an environment that with strategic interventions could usher in improved economic prospects for rural communities.
Demand vs supply and food prices
Dennis Morrison
Wednesday, February 13, 2008
FOOD price inflation is becoming widespread and has raised concerns among policymakers in the leading economies as well as international institutions such as the World Bank. Traditional food surplus countries have not been immune, as can be seen from the fact that rising food prices are one of the main threats to inflation control in the USA, Canada and the European Union, among others. Indeed, only energy and oil prices specifically are thought to pose a greater inflation threat.
Dennis MorrisonAs we in Jamaica well know, sharp increases in food prices are a destabilising factor in the economic environment, particularly because they place more pressure on the most vulnerable socio-economic groups. The rapid rises in the prices of food on global markets in recent times are therefore most unwelcome. Over the past 40-50 years we have, however, been accustomed to fluctuations in food prices as bumper crops, bad weather and crop failures put supply and demand out of balance. In other words, food prices fall sharply when output and inventories are on the rise, causing supply to run ahead of expectations.
But equally, prices escalate when supply drops and especially if inventories are declining without clear prospects for compensating expansion in output. That, after all, is what is happening in the global food markets at this time. The critical question though is, will supply constraints be eased any time soon? Available data suggest that these constraints are likely to get tighter in the immediate term. Just a few days ago, it was reported that global stocks of wheat are expected to fall to a 30-year low and US inventories are already at their lowest level for 60 years. Consequently, wheat prices are at record levels and the rate of increase is accelerating.
Except for weather-related fall in output, this outturn should not be surprising. For some time it has been evident that the growth in demand for food items like wheat has been outstripping the pace at which output has been increasing. This is especially obvious in the case of China and more recently in respect of India. China, having experienced solid expansion in agricultural production starting in the late 1970s and been able to be self-sufficient in food, has moved into a stage where because of spectacular growth in its economy it is now dependent on imports. By virtue of its massive population, even a moderate shift to imports results in significant additional demand pressure on world food stocks.
Last week alone, wheat prices in the USA increased by 10.7 per cent as the price surge reached 50 per cent since late 2007.
Sensing the intensification of supply pressures, major consuming countries such as India, the second largest wheat consumer, have been stepping up their importation of the commodity. The USA itself, which is the world's largest exporter, is said to have sold too much wheat and hence this is why its inventories have fallen so sharply. Favourable weather could, however, take some pressure off the markets by slowing down the drawdown in inventories.
An important effect of high wheat prices is that they will influence the decisions of US farmers in particular, about the allocation of land between different crops.
One of the other crops, soya bean, is also attracting record prices and together with wheat is expected to rank above corn in the planning decisions of US farmers about land use for the next crop period at least. In China and India, which are major wheat producers, government subsidies have kept prices in check and therefore it is less likely that land will be attracted away from crops such as cotton to expand wheat production. Hence, output will not be influenced by the price effect, even as their demand for wheat is projected to continue rising in line with the robust increases in the incomes of their populations.
While this outlook is worrying for import-dependent countries, it is, at the same time, an opportunity for the farming community. For too long, domestic food producers have had to struggle to survive competition from subsidised imports. They have also not been able to plan on a long-term basis since world food prices have usually remained low, but for short spikes related to crop failures. That situation appears to have shifted and may set an environment that with strategic interventions could usher in improved economic prospects for rural communities.
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