Tuesday, June 01, 2010

Food Economics: Changing climate patterns, Emerging market lifestyles and US bio-fuel demand cause Global Agflation

I am back after a hiatus...I was tracking commodity prices the other day and thought hey...food inflation was not getting the attention it deserved..it is so to speak an issue of serious importance for the real economy.

The below chart shows the FAO food price index till April 2010. While the price of cereals has moderated compared to the highs seen a few months back, sugar, lentils and oils (incl. dairy) are driving global food inflation. Sugar has rocketed off the charts with the index at 309 at April 2010 compared to 257 at the end of 2009, a rise of 20% on top of the 41% rise in prices in 2009. Oils have started rising again after a 33% fall in 2009 and are up 14% YTD 2010.

As an aside, Trading on commodities has real impact on people's lives. If you buy 200 shares of Apple (NYSE:AAPL), it is not going to have such a real impact expect on you...but on the other hand, trading corn, wheat and rice on the chicago exchange is going to have a real impact and indeed is having an impact...the import of this will become clear later...

This price rise can be boiled down to a number of issues....the good old way is to look at supply vs demand and add market distortions to it to get a street level picture...

Supply Side:

Bio-Fuels and Subsidies: The US and Europe are an issue here. The farm lobby in the US has obtained upwards US$ 10 bn (20 bn in some years) in subsidies per year to grow more corn for bio-diesel and has banned import of cheaper ethanol from Brazil. This abominable behavior has ruined the life of may farmers in Africa and South America. The US has better ways to help its farmers..but chooses to screw the small guy under the name of free trade..

Result: Unfairly high prices, indirect trade barriers and supply distortions

Climate Change: Everyone is suffering here. The change in patterns has for instance led to the worst monsoon in 37 years in India in 2009. The result was India accessed world markets for rice, sugar etc.. leading to price rises. Climate change will continue to be a  Damocles sword..

The bottomline is that, the need for a second green revolution is now.. unless governments, research estbalishments like IRRI come up higher yield crops, improved irrigation and water management...the social security implications might be too hard to live with..... I am not an alarmist, but I feel if this trend of food inflation continues, it will jeopardize all other objectives of governments in Asia, South America and Africa.....

Demand Side

Emerging markets: 

The lifestyle change in China, Brazil, India, and lately Russia is leading to huge demand for meat and other food items. This is putting pressure on supplies by taking away more land for feed for animals and also increases prices by overall rise in demand. Pork production has rise more than 7.5% per year for the past 30 years according to porkmag.

The implications have been severe. China has an estimated 215 million obese people with kids getting obese alarmingly fast. Additionally, India is the lifestyle diseases capital of the world.

It pays to eat healthy folks..more than anytime now...
Yield Patterns need to be improved too. For instance Indian pulse yields are amongst the lowest in the world at around 500 Kg per hectare compared to a few thousand in other places. This causes big wastage of land resources and water. India being significantly vegetarian, this has serious consequences. Data from the Indian Agri Ministry and stockmarketsreview.com shows that, Indian pulse yields have been stagnant and worse falling a little

Broadly for rice alone, supply needs to rise by 1.8-2.0% each year to keep up with demand. The same goes for pulses in an economy where incomes are rising leading to more demand.

This calls for improved water harvesting, canal management, dams etc.... Pakistan is a clear example of irresponsible water management when population multiplied 5 times (40 million to nearly 200). Pakistani agriculture has been screwed big time as a result...water availability is down 6 times since 1947.

Afforest: The not so apparent point is the importance of afforestation. It is critical to control the Co2 in the atmosphere, reduction acidification of sea waters (up 30% since 1970) and boost soil quality and rainfall. All of these can be done by better afforestation. The deal is simple, things get real bad if we dont do this by 2030 or so...Mother nature will then exercise her Nuclear Option....

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