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STRATFOR: Global Food Prices: A Temporary Fall


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Global Food Prices: A Temporary Fall

STRATFOR TODAY » December 5, 2008 | 1309 GMT


Grain prices have continued to decline since peaking earlier this year. Even so, the immediate causes of the current price decline have not changed the structural constraints that will continue to drive food prices up in the long term.


Grain and other agricultural commodity prices have continued to fall in recent months after reaching record highs in early 2008. Led by wheat, grain prices have fallen more than 50 percent on average from their peaks, according to the Food and Agriculture Organization of the United Nations (FAO).

Although the fall in grain prices comes as welcome relief to countries battered by the global food crisis, a number of signs indicate that this might be little more than a temporary lull. Prices remain well above the lows of previous years, and in the long term, structural constraints probably will keep driving food prices upward as growth in demand outpaces growth in supply.

Several factors contributed to the drop in food prices. First, 2008 was a year of consistently good harvests. The FAO forecasts total cereal production for the year at a record 2.2 billion tons, up 5.3 percent from 2007. Wheat had a particularly good year, with an expected 11 percent increase in production over 2007, bringing global production to a record 677 million tons. These harvests resulted from a combination of favorable weather conditions and the very fact of high crop prices, which spurred farmers to increase planting.

The global financial crisis was also important in driving prices down. For one thing, it diverted speculative investment into other markets. For another, economic downturns decrease demand for grains, as consumers increasingly substitute staple crops for meat and other grain-intensive commodities in their diets. (Meat consumption requires feeding livestock, and thus uses about 10 times as much grain as cereal consumption.) The global slump in oil prices also contributed to falling food prices by decreasing the cost of transportation and other inputs.

But these factors cut both ways, and there are several constraints that will impact food production levels in the short term.

Just as the boom in food prices led to this year’s bumper crops, the prices’ decline is expected to cause farmers to cut back on planting and thereby decrease global supply. One estimate by French firm Agritel predicts a 5 percent reduction in area devoted to grain production in 2009-2010, down to 214 million hectares (about 529 million acres) total.

The credit squeeze resulting from the financial crisis is also expected to curtail food production. This is because it will restrict farmers’ ability to secure loans to cover the upfront costs of fertilizer and other inputs needed during planting season. The scarcity of credit has already been felt in the Southern Hemisphere; Brazil, for instance, slashed its soybean and corn forecasts in November due to the credit crunch. If the crunch persists through the spring planting season in the Northern Hemisphere, where there is far more arable land, its impact will become much greater. Planting for staples such as corn and rice takes place in April and May throughout most of the Northern Hemisphere, as does wheat planting in parts of the Southern Hemisphere. A credit shortfall in these months could have a major impact on the world food supply.

Moreover, 2008’s increase in grain production notably was almost entirely concentrated in developed countries. The FAO estimates that once Brazil, India and China are excluded, grain production in developing countries actually declined by 1.6 percent in 2008. Some of the countries facing declining production, such as Argentina and Iran, will likely be among those hardest hit by the credit crunch.

All of these factors indicate that the fall in grain prices might not last beyond the current crop cycle. And in the long term, the same structural constraints remain in place that have been driving up food prices ever since they bottomed out in the late 1990s.

The rising food prices of the 21st century have primarily resulted from surging demand due to population and urbanization pressures, particularly in Asia. The populations of countries like China and India are growing rapidly, which obviously increases demand for grains due to the basic fact of creating more mouths to feed. Beyond that, these populations also are becoming more prosperous and more urban, processes which further increase demand pressures. Higher living standards mean that poorer consumers can afford a greater number of staple-based meals per day, and that more affluent consumers can increasingly substitute more grain-intensive meat and dairy products for staple crops in their diets.

Meanwhile, urbanization has decreased the proportion of arable land used for grain production in many countries. Throughout Asia and Europe, formerly agricultural lands are being converted for residential and industrial uses, and the growing demand for meat and dairy products also causes arable land to be switched over to pasturage. These processes, combined with environmental factors, mean that the amount of arable land is failing to keep up with the increased demand for grain. In China alone, the government estimates that available arable land shrank 6.8 percent between 1996 and 2007 due to desertification and development.

The growing use of biofuels is yet another factor spurring a long-term increase in food prices. Biofuels decrease food supplies by diverting arable land and crops like sugar and corn used to produce them, and by encouraging farmers to switch planting away from crops like wheat toward those that can be used for biofuels. While enthusiasm for biofuels might have died down somewhat in the past year, the products have become a permanent feature of the agricultural sector, and their usage will continue to rise. In the United States, for instance, about 30 percent of the total food crop is expected to be used for ethanol by 2010.

These constraints will continue to hold unless there is a marked increase in agricultural productivity or some other structural change in the operation of grain markets. Taken together, these factors indicate that although current low food prices might be a welcome relief, the respite is likely to be temporary. The long-term food picture remains much the same as it was a year ago.

I can't stay away from neat charts and graphs.

So, here's some more interesting observations from the USDA...


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