Watch out for food price inflation - it may get much worse this year

 

Rabobank has some interesting - and worrying - forecasts about what may happen to world agricultural prices this year.  It's a long, detailed analysis, but it repays the effort needed to read through it and absorb what they predict.  If they're right, we - consumers - are likely to face significant increases in our food costs, both this year and for the foreseeable future.  For those on tight budgets, this is not good news.

Text in italics is my emphasis.

Today’s elevated [food] price trajectories shows nobody had the foresight, fortitude or financial power to stockpile in the years of plenty, but there are many more factors at play. Rabobank’s recent report already covered the key drivers of the agri bull market. We will quickly reprise them as follows:

#1 Seven years of plenty ironically leave global agri commodity stocks low. Before the recent run-up, the S&P GS Agri Commodities Market Index had fallen over the last seven years as the price shock of 2010-12 incentivized diversified supplies and a shift from high cost to low cost producers/exporters. This was good news for importers, but bad for the high-cost US, who saw its stocks steadily increase through 2019. The US-China trade war and Covid-19 also saw US farmers adjust acreage lower in response.

When demand then surged in mid-2020, higher cost exporters, especially the US, sold both their production and stores. In short, the US --the global food reserve bank-- has seen its grain and oilseed stockpiles slip nearly 30% y/y (see Figure 3), primarily in corn and soybeans. Moreover, we forecast only a slight increase in 2021 as our base case.

#2 China is driving demand. It is aggressively bidding for supplies to fill shortfalls and pad inventories (see Figure 4). Convalescence from dual pandemics --African Swine Fever and Covid-19-- has led to a surge in agri import demand, and hence global prices. The most remarkable increases have been in feed grain, the energy source for animal protein and ethanol: China’s imports of these have risen almost three-fold in a year to address a structural supply gap that cannot be addressed by domestic production. Indeed, China is so stretched for feed it is resorting to using old domestic wheat reserves for livestock -- 35m metric tonnes this year alone, equivalent to Canada’s production-- in addition to vegetable oil, and even pig lard.

China’s moves are singlehandedly testing supply chains to their limits. The saving grace for global markets has been that world demand across many of China’s favoured imports was absent or squeezed until now; when it returns, global supplies could be stretched further.

#3 Supplies are on a tight-rope. Coming months will see a scramble by farmers to plant and harvest. With many products facing scarcity, competition for limited arable land will limit the potential resupply. The US, for example, can only increase its summer plantings by about 5%; any production on top needs to come from yield improvement.

#4 Everything depends on the weather, where key exporters face an uphill battle. Large swathes of South America are too dry or too wet; meanwhile, much of the spring planting area in the US faces significant dryness.

#5 There is a heightened risk of protectionist policies. Many critical agri exporters are already putting up tariffs or export quotas, threatening free trade and curtailing local farm prices and domestic production to keep prices affordable. Rather than fulfilling their critical global role, such exporters are increasingly insulating themselves from global markets: Russia, the world’s largest exporter of wheat, has implemented grain export taxes; Ukraine export quotas; and Argentina, the largest exporter of protein feed, has dabbled in export quotas too.

#6 Logistics are tight. If a rising tide lifts all boats, a lack of boats lifts prices. ASF, Covid, and weather events all drive demand shifts that suppliers have been unable to anticipate or react to easily. Freight prices have jumped to a record for containers: bulk (measured by the Baltic Dry Index) has also seen large increase, and this has delayed and displaced shipments: naturally, these higher prices fall heavily on importers.

#7 Speculators. Wall Street funds already hold in-the-money positions in soy and corn – by far their largest net long position. Financial market investors currently hold contracts of grains, oilseeds and livestock worth almost 50bn USD net length or 35% of the value of all US agricultural exports in 2020. (see Figure 5.)

. . .

In short, global supply chains appear bereft of the underlying geopolitical stability assured until recently ... A further ‘political’ catalyst is biofuels, beneficial for farmers and the environment, but which exacerbate agri commodity supply stresses by shifting production from food towards renewable energies made from agri commodities: namely biodiesel and ethanol ... In short, in the short term -- where politics happens -- the Green transition could mean higher food prices.

. . .

China is the single biggest swing factor besides weather/production. It has the potential to disrupt global agri balance sheets for years to come ... China is expected to import 35-45 million metric tonnes of feed grains per year for the coming years - much more if rosy production expectations are unfulfilled. If China’s domestic output disappoints, it would exacerbate a structural deficit requiring yet higher imports of grains and oilseeds --by as much as 15m metric tonnes-- and raise global prices of corn and soy by additional 30%.

. . .

In short, if we were to see bad weather; and protectionism/sustainability-related regulations; and further heavy buying from China; and a surge in Wall Street speculation then it is hard to say just how high prices could reach before demand destruction kicked in.

There's much more at the link.  Recommended reading for all who follow commodity markets, and everyone involved in food production and processing.

The trouble is, official inflation figures don't fully take into account any potential increase in food prices.  They assume that if one food becomes too expensive, consumers will substitute another, cheaper food for it, and that therefore their food bills overall won't be too badly affected.  However, what happens when all foods become more expensive?  Suddenly there's no more "wiggle room".  Suddenly one's budget takes severe strain, and one's overall cost of living goes up substantially - but that still won't be reflected in official government statistics, because the bureaucrats who calculate them go by their artificial price theories, not by reality on the street.

That means cost-of-living increases in entitlements, welfare, etc. (which are based on the official rate of inflation) simply won't keep pace with food costs.  In turn, that offers the potential for increased social unrest as people struggle to cope.  It also makes a direct and immediate contribution to the crime rate, as poorer people turn to shoplifting and other crimes to make ends meet.  That, in turn, can lead to food vendors and suppliers abandoning the areas in which crime increases, because it costs them too much money to be there;  and that's one way we get the infamous "food deserts", often ascribed to racism, but in reality an economic necessity for vendors.

The advent of the Biden administration is also bad news for food prices, thanks to its support for the so-called "Green New Deal".  Among other things, this de-emphasizes domestic oil production in favor of the use of fuel additives such as ethanol, made from corn.  That means farmers will sell their corn - and plant more in order to sell more - for the higher prices offered by fuel processors, rather than the lower prices obtainable from food suppliers.  Hey presto!  There's less corn for us to eat, and to feed to cattle so that we have meat to eat, and to export to others who need to eat.  (That's one reason why eco-nazis keep demanding that we eat less meat.  It means more corn and feed will be available to make "green" fuels.)

So, you see, food prices aren't just a matter affecting your wallet.  They have dramatic ripple effects across the society in which we live.  That's why it's worthwhile to keep an eye on national and international trends in food supply.  What shows up on the "macro", big-picture level is bound to affect our "micro", local level in due course.

Peter