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10 July 2012
Global food price inflation risks rising again?
Risks of renewed global food price inflation are lifting. Higher food prices may limit the ability to use monetary stimulus in some economies – another downside risk to growth. Australia is less exposed to the global inflation consequences and stands to benefit from higher global food prices.
One of the big themes in HI 2011 was global food price inflation and the policy challenges it posed. Food price concerns then subsided as supply conditions improved and other issues took centre stage. But one lingering effect is the policy tightening pushed through in a number of economies as a response to general inflationary pressures in 2010/11. That policy shift successfully dealt with the inflation issues but came at the expense of weaker economic activity. And concerns about “hard landings”, especially in China. From that perspective the recent lift in key food prices is of concern. Prices for grains and oilseeds, the staple foodstuff for human and livestock populations worldwide, spiked higher in June and have risen further in July. As with any agricultural commodity price spike, this episode reflects weather-induced supply issues. Drought is hurting production in key exporting regions. Growing risks to US crop production is particularly concerning. Most of the growth in demand for the major crops is coming from China and other emerging and developing economies. These countries would bear the brunt of any sustained lift in staples prices. As a result, global trade flows would be affected by the possible scarcity of corn/soybeans for export in key exporting nations. Livestock producers would experience input cost pressures. Food & beverage manufacturers would face margin compression. The biofuels sector could also be squeezed between higher input costs and falling oil prices. Being the ultimate “necessity” higher food prices are hard to avoid. Relative price shifts would affect consumption patterns. Policy makers remain focused on “Europe” and central banks typically “look through” supply-driven price spikes when thinking about policy settings. But the importance of food in the CPI’s of many of the economies affected may limit the ability to use monetary stimulus if it were required. Higher food prices would be another downside risk to global growth. Spikes in food prices can spill over into other areas as well. There are indications that rapid food price rises is often followed by periods of above-average civil conflict. One negative feedback loop evident from instability in some countries was in the geopolitical risk premium added to oil prices at various points over the past year or so. Any indication of social and political instability in the current environment will weigh on already depressed financial market sentiment. The Australian economy would be subject to many of the same influences from higher food prices as the rest of the world. Any restraint on Asian economic activity would be a negative for Australian growth prospects. And any impact on global financial markets would be reflected in Australian markets as well. But there would also be some important differences as well. Australia is a major agricultural producer facing a significantly different supply backdrop. So domestic supply should limit the inflation impact of global production shortfalls. Australia is also a major agricultural exporter and stands to benefit from higher global food prices. The impact would be much less than from higher resource prices. Nevertheless, a repeat of the 20%pa rises in food prices in 2010-11 would be worth close to an additional $6bn (½% of GDP) of additional export income annually (volumes unchanged). Not all of outcomes would be positive for the Australian economy. Consumers’ inflation expectations, for example, are conditioned by their experience with items that they purchase frequently. And food is clearly in that group. Higher food prices could have a negative impact on inflation expectations with a potential to flow back into second round price rises. Part of the general unhappiness evident in the household sector reflects cost of living issues. So higher food prices could weigh on sentiment and spending appetite.
Michael Blythe Chief Economist T. +612 9118 1101 E. email@example.com Luke Mathews Agri Commodities T. +612 9118 1098 E. firstname.lastname@example.org
Important Disclosures and analyst certifications regarding subject companies are in the Disclosure and Disclaimer Appendix of this document and at www.research.commbank.com.au. This report is published, approved and distributed by Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945.
Global Markets Rese earch
Eco onomics: Is ssues
Glob food price bal e infla ation was a bi ig them in HI 2011 me 1… One of the big the emes in the fiirst half of 2011 p cy was global food price inflation and the polic ed. his ted challenges it pose Part of th rise reflect porary supply disruptions. But part of the y t temp food price story was a longer- run dynamic. w . d owth in emerg ging economies is Rapid income gro lifting the demand for food, es g d specially in As sia. And t growth of the biofuel iindustry is the f boos sting demand for “food” co d ommodities. Food price conce d erns subsided as supply d cond ditions improv and other issues took ved r centr stage. But one lingering effect is the re t e g polic tightening pushed throu in a numb of cy p ugh ber econ nomies as a re esponse to g eneral inflatio onary press sures in 2010 0/11. That po olicy shift succ cessfully dealt with the infla t ation issues but b came at the expense of weake economic e er activ vity. And concerns about “ gs”, “hard landing espe ecially in China. Here we go again e n? But staples price es are rising again. From that perspec m ctive the rece lift in lift in key ent n stapl prices is of concern. les o Price for grains and oilseeds, the staple es a foods stuff for human and livesto populatio ons ock world dwide, spiked higher in Ju and furthe in d une er July. The downtre of the pa year or so end ast o ears to have ended. In Jun e ne/early July: : appe • • Corn prices spiked up by 4 C s 41%, wheat prices by 33% and soybea by 26%. p % ans Compared to ten-year ave C erages, corn prices are up 120%, soyb ean prices ar up p re 105% and wh 1 heat prices ar up 65%. re Corn prices are now within 5% of record C a n highs (set mid h d-2011) and s soybeans are e within 1% of record highs (in 2008). w
12 2 CPI 12
GLOB BAL FOOD P PRICES
% 80 0
(a annual % chan nge)
…which receded as d ply supp improved and other issues took centre stage k e.
-40 0 Jan 91
-40 Jan 95 Jan 99 Jan 03 Jan 07 Jan 11
% 24 4
CHINA: PRIC C CES
(a annual % chan nge)
0 CPI (ex food) -12 2 Jan J 05
-12 Jan 07 Jan 09 Jan 11
GRAIN PRIC G CES
(Chic cago Board of Trade)
US Sc/ bu 800 0 Wheat USc/ bu 800
The j jump in corn, soybeans an wheat is not nd n yet e evident in rice prices, the o e other global stapl Comfortable supply m le. means rice pric ces were range-bound over the pa eighteen e d ast mont and are 40% below 20 highs. ths 4 008 Wea ather-induced d supp issues are to ply e blam me. Blam the weather me As w any agricu with ultural comm modity price sp pike, this e episode reflec weather-i nduced supp cts ply issue Drought is hurting pro es. oduction in ke ey expo orting regions. Poor conditions hit South Ame r h erican soybea an and c corn crops ar round the tur n of the year. . Drou ught in the Former Soviet U Union in early y 2012 reduced wheat output. M 2 More significa antly, drought condition are now dis ns stressing US corn soybean crop The risks now lie with ps. s and s further significant price rises. Rainf throughou the US Mid fall ut dwest, the ke ey corn and soybean producing r n region, was ju ust 50% of normal for June. S Searing heat 5%-5
300 0 Jul J 10
300 Jan 11 1 Jul 11 Jan 12 Jul 12
US DR ROUGHT MO ONITOR
(a at 26 June 2012) as
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accompanied the dry conditions and by late June the US Drought Monitor reported severeto-extreme drought throughout most key US cropping areas. Crops have wilted and official crop conditions have tumbled. The USDA’s US corn crop ratings slumped from 77% “good-toexcellent” in mid-May to just 40% by early-July. Significant global food price inflation remains a risk rather than reality at this stage. As a result, US crop yield estimates are being revised lower. For example, we now put the US corn crop at 13.5bn bushels, 9% lower than the USDA’s current estimate. Under our analysis, corn inventories would decline by 27% in 2012/13 (rather than rising 2.2-times as previously forecast by the USDA). This shift in inventories raises the possibility of supply shortages and significantly higher prices. Similar comments apply to soybeans. We now believe that drought-related declines in yield will see some demand rationing in HII 2012. Food prices and the global economy Emerging economies are most at risk. Most of the growth in demand for the major crops is coming from China and the other emerging and developing economies. These countries would bear the brunt of any significant lift in staples prices. As a result, global trade flows would be affected by the possible scarcity of corn/soybeans for export in key exporting nations. Livestock producers would experience input cost pressures. Food & beverage manufacturers would face margin compression. The biofuels sector could also be squeezed between higher input costs and falling crude oil prices. Being the ultimate “necessity” higher food prices are hard to avoid. Relative price shifts would affect consumption patterns. Food accounts for a smaller share of economic activity in the advanced economies. The direct inflation impact of higher food prices is significant for emerging and developing economies but generally low for advanced economies. Food accounts for a much smaller share of consumer spending in the advanced economies. Global policy makers remain focused on “Europe” and central banks typically “look through” supply-driven price spikes when thinking about policy settings. But the importance of food in the CPI’s of many of the economies affected may limit the ability to use monetary stimulus if it were required. Spikes in food prices can spill over beyond the broad economics into other areas as well. There are indications, for example, that periods of rapid food` price rises are often followed by periods of above-average civil conflict. A recent IMF study also concluded that, on average, a one standard deviation lift in the food price index increases the number of
FOOD PRICES & CIVIL CONFLICT
Food 250 prices (Index)
US CORN CROP CONDITIONS
% 75 Range (2005-2010) % 75
55 2011 45 2012 35 Early May. Early Early Jun. Jul. Early Aug. Early Sep. Early Oct.
DEMAND FOR MAJOR CROPS
(contribution to global growth)
Other emerging & developing economies China
0 Advanced economies
-2 2000 2003 2006 2009
Higher food prices may limit the ability to use monetary stimulus if required.
Food price inflation is often followed by periods of aboveaverage civil conflict.
R² = 0.52
50 50 100 150 200 Number of conflicts (medium-high intensity)
Global Markets Rese earch
Eco onomics: Is ssues
demo onstrations/ riots in low in r ncome countr ries by 0. standard deviations (s IMF Work .01 see king Pape WP/11/62 Food Prices & Political er Insta ability by R Ar rezki & M Bru uckner). Insta ability can ha ave a ne egative influen nce on oil prices… o …an financial nd market sentiment. vident from One negative feed dback loop ev ability in some countries w in the e was insta geop political risk premium adde to oil price at p ed es vario points ove the past ye or so. ous er ear Any i indication of social and po olitical instability in the current environment will weigh on alr e ready depressed financial market se ntiment. Food prices and Australia d Aust tralia would n not be im mmune… The A Australian economy would be subject to d t many of the same influences fr y e rom higher fo ood price as the rest of the world. Any restrain on es . nt Asian economic activity would be a negativ for n a d ve Austr ralian growth prospects. A any impact And on gl lobal financia markets wo al ould be reflec cted in Au ustralian mark kets as well. But t there would also be some important a differ rences as we ell. …bu is less ut expo osed to inflat tion risks s… Austr ralia is a majo agricultura producer fa or al acing a significantly different supply backdrop. Water W ages are full and subsoil m a moisture levels are s stora gene erally favourab ble. Product ion prospects are s enco ouraging as a result. So domestic supp should lim the inflatio ply mit on act p hortfalls. impa of global production sh …an national nd inco ome would be e boosted by highe er d food prices. Austr ralia is also a major agricu ultural exporte er and s stands to ben nefit from hig her global foo od price As with th resources boom of rece es. he ent years the transmission mecha s, anism into the e Austr ralian econom would be through a hig my gher terms of trade. The impact wo s ould be much less h than from higher coal, iron ore and base metal c e es ated items, fo r example, price – food-rela acco ounts for only about 12.5% of Australia % an comm modity expor rts. Neverthe eless, a repea of at the 2 20%pa rises in food prices in 2010-11 s would be worth close to an ad dditional $6bn n % xport income. . (≈½% of GDP) of additional ex Not a of outcome would be positive for th all es he Austr ralian econom Consum ers’ inflation my. expe ectations, for example, are conditioned by e their experience with items tha they purchase w at uently. And fo is clearly in that group ood y p. frequ Higher food prices could have a negative e act ns ential impa on inflation expectation with a pote to flo back into second round price rises. ow s d It has been appar s rent for some time that e cons sumers are ge enerally unha appy despite a resilie domestic economy. T word “clo ent c The oud” deriv from resp ved ponses to the CBA survey of e cons sumer percep ptions reveals the importan s nce of co of living issues in drivin household ost ng d conc cerns. So higher food pric could weigh ces on se entiment and spending ap ppetite.
0 Dec-02 Sep-04 Jun-06 Mar-08 Nov-09 Aug-11
Inde ex 45 50
CBA COM MMODITY PR RICE INDEX
(19 997=100, USD te erms)
Metals M All items Index 450
AUS: FOOD & COMMO D ODITY PRICE ES
(a annual % chan nge)
CB Rural BA Commod Price Index dity (adv 2 qtrs, rhs) 8
0 CPI Food prices (lhs) -4 Sep 87
-40 Sep 92 Sep 97 Sep 02 2 Sep 07 Sep 12
INFLAT TION EXPECTATIONS
Source: CBA/ /Melbourne Institute
Food prices (lhs) 3
0 2.6 Inflat tion expectations (rhs) -3 Se ep-01 Sep-03 Se ep-05 Sep-07 Se ep-09 Sep-11 1.5
Infla ation expe ectations are e one source of ris sk.
Cos of living st conc cerns are weig ghing on sent timent and spen nding appetit te.
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