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Food prices will push inflation rate higher

By Bhaskar Raj



Food prices will remain high in 2008 globally and will change overall inflation expectations, according to financial management and advisory firm Merrill Lynch.

“There may be some cyclical downside risk to food prices in 2008 if growth gets weak enough,” Merrill Lynch said in its report on thematic investing. “Agflation, or agricultural inflation, is still with us. It is affecting a variety of agricultural products, markets and countries. Agflation will remain a force on the inflationary front for the coming years,” the report said.


Food prices are on the rise across the globe and in various developed world economies agflation is accelerating. The secular agflation theme remains intact, but may suffer from a potential cyclical unwind globally. 


Global economic growth, led by the US slowdown or recession, will probably be much slower this year. Given the introduction of energy-related demand into the global food production function, there may be possible short-term, cyclical, effects.  If the global slowdown is more substantial than currently anticipated, and oil prices were to fall due to lack of sufficient demand, the upward pressure seen on food prices emanating from the energy sector would be temporarily assuaged.


Global constraints on food production are shifting production patterns and pressuring prices. Economic development, pollution, and a lack of water for irrigation are all forces behind the constraints on arable land.


Agflation is lifting inflation rates in the emerging markets as well. China’s inflation rate may be heading to a 10-year high due in large part to agflation.


The population in the developing world is ageing, and dietary patterns are changing accordingly. The emerging markets are going through a period of economic development and urbanisation, where per capita incomes are rising. As a result, food consumption is transitioning from a simple subsistence diet to more processed foods. Energy’s introduction into the global agricultural production function has put tremendous upward pressure on food prices.


Given the continued development of emerging economies, energy demand should remain strong and alternative energy should continue to put pressure on food production.


Agflation accelerated in some countries. In others, food prices remain high but have not increased further. Agflation in Singapore, however, is rising more rapidly than at any time I almost the past 30 years. Various product markets saw agflation re-emerge throughout 2007. 


In the corn market the passage of the energy bill mandating use of corn-based Ethanol pushed corn prices up, approaching the $4 level once again. Wheat prices continued to set new all-time highs going into 2008. One source of rising wheat prices is the weak level of plantings. 


According to the US Department of Agriculture, plantings of winter wheat in the United States rose only 3.6 per cent to 46.6 million acres from the prior winter. Plantings were expected to rise by almost eight per cent this winter to 48.5 million acres.