Thursday, September 20, 2012

Food Price Deflation / Inflation

Swedish farmer from Wikipedia

A report from Radobank in the Netherlands is being reported on (primarily) in the business press, suggests a rather miserable year or so ahead for consumers. As reported in the Guardian, the American drought of this summer has started off a mass cull of grain-fed stock, due to rising feed prices. This means primarily hog and beef herds are being rapidly reduced, but on can expect poultry to be next if prices continue to rise (chickens are one of the most efficient converters of grain to protein, but even they can become uneconomical if prices rise too far).
In the very short term, this liquidation means lower meat prices as farmers cut their hog herds back (hog herds can be rebuilt much quicker than cattle--six months or so as compared to a year and a half for cattle).
But even with the near term drop in prices, the long term outlook being predicted by Radobank is a 14% rise in the price of the average developed world food basket--primarily because of a rise in meat prices. Meat and dairy account for about 52% of the cost of the standard global food basket, so an increase in meat prices has a greater inflationary effect.
Nicholas Higgins, a Rabobank commodities analyst and author of the report, said: "There will be an initial glut in meat availability as people slaughter their animals to reduce their feed bills. But by next year herds will be so reduced that there won't be enough animals to meet expected demand and prices will soar."
The current liquidation has depressed pork prices, but by mid-2013, demand is expected to outstrip supply, and futures markets are already forward pricing a 31% increase for pork delivered in July 2013.
Rabobank predicts the overall price of the basket will soar to a record 243 on the United Nations Food and Agriculture Organisation (FAO) index next summer, which is well above the numbers the New England Complex Systems Institute suggest bring social unrest.It is not very likely that we will experience food riots in North America, as we have access to food alternatives--we can always switch back to staples if meat prices rise too high, so hunger is less of a factor here. But as I've said before, it's a hell of a way to test a theory.

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