Soaring corn, soybean, and wheat prices have caught the attention of governments around the world.
France, the United States, and Mexico will hold a conference call at the end of August to determine whether an emergency meeting of the G20 nations is warranted to head off a repeat of the 2007-08 spike in food prices that triggered riots in parts of the developing world.
The worst drought in decades in the United States coupled with problems in the Black Sea region could hasten calls for the United States to change its ethanol policy as well as pleas to Russia to not impose export bans.
A day following the release of USDA’s August World Agricultural Supply and Demand Estimates, which dramatically cut production forecasts for both corn and soybeans, the United Nation’s food agency had already stepped up pressure on the United States to change its policy on ethanol.
Global food prices are still below their all-time highs set in February 2009, but they are rising. On Aug. 9, the Food and Agriculture Organization released its July Food Price Index, which rose to 213, up 6% from May levels, but still below the record high of 238.
The problem with indexes is that they reflect the weighting given to the various food products used in the index, says Michael Swanson, Wells Fargo agricultural economist, Minneapolis. For instance, he says, rice prices have not spiked, and much of the world’s diet is rice-based. "It’s probably as stressful now as it was in 2008-09, but the developed world will feel the impact this time more so than the developing world," he says. The exception to that will be the lower to middle income countries with wheat-based diets, particularly those in the Middle East.
Dwindling Feed Use
Swanson notes that in 2005-06, 6.2 billion bushels of corn went to feed use. In 2007-08, 5.9 billion bushels of corn was used for feed. USDA’s latest estimate for the 2012-13 crop calls for 4.1 billion bushels to go into feed channels. "Feed use of corn has fallen by one-third in seven years," Swanson notes. "Some of the loss is offset by distillers’ grains but not all." U.S. consumers should begin to really feel the impact of surging corn and soybean prices later this year, he adds, when retail meat and dairy prices increase.
U.S. retail food prices, on average, have been flat for the first half of the year despite surging commodity prices. "The food-at-home Consumer Price Index (CPI) decreased 0.1% from January to June 2012, with deflationary pressure due to unusually low fruit and vegetable prices as well as decreased prices for fluid milk and pork," USDA says in its monthly summary.
"Alternatively, prices for beef and veal, poultry, and fats and oils have increased thus far in 2012. The severe drought in the Midwest is expected to affect prices for corn and soybeans as well as other field crops, which should, in turn, impact retail food prices. However, the transmission of commodity price changes into retail prices typically takes several months to occur, and most of the impact of the drought is expected to be realized in 2013."
USDA’s Economic Research Service’s inflation forecast for all food—food purchased at retail and in restaurants—for 2012 remains unchanged at 2.5 to 3.5%. Next year, inflation is expected to remain strong for most animal-based food products due to higher feed prices and above the historical average for cereals, bakery products, and other foods.
"The full extent of the drought and its effects on commodity prices are as yet unknown," USDA says. At this time, USDA’s best estimate is for 3 to 4% increases in food prices next year. In 2008, U.S. food prices increased 5.5%.
USDA also notes that raw commodities account for only 14% of the average retail food price. "So even if all commodity prices doubled, retail food prices would increase by about 14%," says USDA. Energy, transportation, labor, processing and marketing costs play a much larger role. Unlike today, crude oil prices also hit record highs in 2008 of more than $145/barrel.