What to Make of Rising Food Prices
MarketWatchFeb. 10, 2011
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By Dave Kansas
As investors nervously watch the situation in Egypt, one theme has emerged that seems to underpin the protests there and elsewhere: rising food prices.
Last month, the United Nations Food and Agriculture Organization reported that its index of farm commodity prices reached a new record. Other commodity prices, notably fuel, are also rising. The increased commodity costs have contributed to the overthrow of the Tunisian government and civil unrest in Ghana, Algeria, Pakistan, Yemen and elsewhere. In India, people have taken to the streets in protest over rising onion prices. In China, apple prices have jumped 50% in the past year.
With the turmoil in Tunisia and Egypt, some believe that governments in troubled neighborhoods may start snapping up more food to try and ensure supplies for their disgruntled masses, which could add even more to food price pressures. In sum, while precious metals and energy tend to dominate headlines, agricultural commodities may be even more strongly positioned to gain ground in this season of political uncertainty.
The spike in food prices present investors with three questions to consider: What kind of inflationary impact will the price gains have? How will rising food prices affect the political risk equation in emerging markets? And is it time to get long or go longer agricultural commodities?
Rising food prices come as economic forecasts improve. HSBC has raised its growth estimate for developed markets in 2011 to 2.3% from 1.8%. But that pales next to their emerging markets forecast of 6.4% growth in 2011, with China and India expected to notch growth rates above 8%.
The economic recovery is gathering steam, once again uncovering output gaps that had slid away during the downturn. And the increased economic activity is placing more pressure on commodity prices. Wheat, corn, oats, rough rice and soybeans are all at their highest levels in more than two years. Wheat has more than doubled from last spring's levels.
J.P. Morgan says that even in the face of recent food price gains, they expect prices to move higher still over the next few months, due to low inventories and slack production. The brutal weather of recent weeks, ranging from cyclones and floods in Australia to uncommonly cold weather in the Southern U.S. and Mexico, has made the agricultural climate even rougher.
Will that have an impact on inflation? In the developed world, the answer is probably not. Agricultural staples make up a surprisingly small amount of consumer inflation measures because of efficiencies in production. The calculus for emerging markets is different. And already food and energy costs are contributing to inflation spikes in China (around 5%), Brazil (5%) and India (9%).
Emerging market countries, especially China, are trying to tamp down growth intensity to reduce inflation pressures. Thus far, however, they aren't having much luck.
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