Russia’s decision to stop all grain exports due to extreme heat and unpredictable weather patterns will eventually hit consumers’ pocket books – it is just a matter of time. There and elsewhere, agriculture is increasingly wilting under the wrath of climate change. Drought in the Black Sea region and floods in Western Canada are having a big impact on grain prices. Climactic shocks send markets and speculators alike into flurries of activity, and threaten to launch food prices skyward. Most would agree that, when a storm descends, it’s often best to wait it out until the sun returns. But make no mistake – these sudden market swings signal the start of a new era.
Russia had planned to become the World’s most important exporter by 2020. Russia and its neighbouring Kazakhstan and Ukraine in recent years have emerged as major rivals of wheat-exporting nations such as the U.S., Australia, and Canada. The Eastern bloc is now finding out that weather can quickly put entire economic development policies into meltdown. When wheat is affected, other commodities follow. Wheat is used not only to make food but also rations for livestock, which could increase demand for crops such as corn. That is why the supply-driven rally on markets triggered by the wheat situation is pulling other commodities along with it. Increasing numbers of investors looking to fill the void left by a weakening American greenback makes market fluctuations even more pronounced.
How much higher food prices will go remains unclear. Most agricultural commodities are trading higher these days: soybeans are at their highest price since December 2009, same for corn, and Coffee is sitting at $1.70 a pound, its highest level in over 12 years. Most food giants are not disclosing how much they intend to raise their prices, but most input prices – such as wheat, pork and coffee – will climb a combined 15% by July 2011. Wheat is also drawing some attention as it is trading at well over $7 a bushel, its highest price point in a few years.
In the aftermath of the 2008 food price increases, many food retail prices in the Western World for products such as breads, pastries, and pasta increased by 20%. When Mother Nature makes agricultural commodities attractive to investors, farmers will cash in at harvest. Even though many would regard looming hikes in food prices as likely, the situation is not quite the same as in 2008.
Back in 2008, commodity prices were not the biggest factor in the increase of food prices at retail. At the time, oil was trading at $146 a barrel, a record high. Because of population density, or the lack thereof, we rely heavily on transportation which tends to drive up energy costs. The current cost of energy is nowhere near what the food industry had to cope with a few years back. So prices will likely increase but at a much slower pace than a few years ago.
Yet, higher food prices may actually be coming at the right time. Because we are all consumers, we naturally think that low prices are good. But consumers often do not correlate the trend in prices to the trend in income. It’s true that, as long as your income stays constant, lower inflation rates are best. And the same is also true if national income stays constant. Given these conditions, a disastrous scenario would be to see inflation fall due to national income shrinking. However, inflation these days in the Western World is already dangerously low. Our Consumer Price Index in Canada, the main indicator for inflation, which has been hovering at around 1% in recent months, is in great need of a little push upwards. In the United States, there is even some talk about deflation as the unemployment rate remains at around 10%.
Maybe surprisingly, nutrition may also improve as a result of these increases. Salt, sugar, fast foods – consumers are eating too much of too many nutritional evils. Affordability and convenience have been the main drivers for quite some time now. But incremental and reasonable hikes in food prices may compel consumers to repair food consumption habits that have been ingrained over the last few decades when cheap foods were king. Spending barely 10% of household budgets on food, and thinking about food choices just as little, is slowly becoming a thing of the past. Further, more distributed wealth will provide resources for a food industry in its ongoing quest for innovation and safer products.
What is happening to agricultural commodities is hardly a crisis but rather a continuing recalibration between supply and demand. We are merely going through a transition period in our food production and distribution systems. More than a billion people will join the middle class by 2030, and many of them won’t live near arable lands. This will put a strain on grain supplies and will expose food systems to significant systemic pressures. No one knows how things will evolve over time but we are definitely seeing the beginning of a new world order in food.