Despite March Drop From All Time High, Near Record Food Prices Predict Jump In Headline Inflation

Tyler Durden's picture

The UN's Food and Agriculture Organization, whose January print was the catalyst for us to predict revolutionary food riots ahead of time, released its March food price update - "the Food Price Index (FFPI) averaged 230 points in March  2011, down  2.9 percent from its peak in February, but still 37 percent above March last year. International prices of oils and sugar contracted the most, followed by cereals. By contrast, dairy and meat prices were up." So in essence the drop in the volatile energy component has been transitory, courtesy of WTI and Brent now at 30 month high, and the April number will be yet another surge. Reuters agrees: "new increases are in sight as demand grows and supplies tighten, the UN Food and Agriculture Organisation said. Rising food prices have climbed to the top of the
international political agenda after contributing to protests that
toppled the rulers of Tunisia and Egypt earlier this year, with unrest
spreading across North Africa and the Middle East." The spin: ""The decrease in the overall index this month brings some welcome respite from the steady increases seen over the last eight months," David Hallam, director of FAO's Trade and Market Division, said in a statement. "But it would be premature to conclude that this is a reversal of the upward trend," he said." It isn't. And with loose monetary policy expected out of the US for as wide as the eye can see, little if anything will change for a long time.

Here's why the April number will be another record:

 The March fall was largely driven by disruptions to major grain importers -- political unrest in North Africa and the Middle East and natural disaster in Japan -- while fundamentals of demand and supply have not improved, the FAO experts said.

"We believe that in the next few weeks, and there are already signs of it, prices will rebound," Concepcion Calpe, FAO's senior economist told Reuters in a telephone interview.

Political instability in North Africa and the Middle East, which affects grain import decisions in the area, would influence already volatile grain markets, while soaring oil prices would fuel further rises, the FAO said.

Brent crude traded around $122 a barrel on Thursday having hit a 2-1/2-year high above $123 the day before, driven by violence in the Middle East and North Africa, including Libya where rebels are fighting against the rule of Muammar Gaddafi. Brent started the year around $94 a barrel.

And regradless of whether prices go up much higher or not, a far more relevant issue is that, as John Lohman shows, the FAO index, which leads the CPI Food and Beverage index by 8 months, predicts some serious spillover into headline inflation over the next half year period. In summary: recent FAO prints predict a price acceleration to 4.8% Y/Y by November.

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tek77blu's picture

Great Bob Chapman interview on coming increases in inflation, gold and silver prices, and mining shares:

EscapeKey's picture

There's another important point in the latest report; the cereal supply/demand picture, when combined with what's in storage. The supply picture is NOWHERE NEAR as bad a all the Keynesians will let you to believe, and the storage is more than enough to cover the next 10 years given an identical supply/demand figure. Rising prices is not entirely down to supply disruptions.

The supply figure is essentially higher than the 2007 figure (and all prior years), and still the 3rd highest on record.

eigenvalue's picture

The problem is that agricultural products are unlike industrial ones. Agricultural output is highly volatile and heavily dependent on the weather. The planting in the Northern Hemishpere has just started. If the crops fail because of bad weather, the whole supply/demand picture will change dramatically. The FAO figures are only forecasts. 

EscapeKey's picture

According to the record, we saw the largest supply/demand disequilibrium in 2003, yet we saw no price rises to reflect this in those years. If it went by the potential of failing crops alone, then we should have seen rising prices.

But we didn't. We also didn't print money to anywhere near the same extent back then.

eigenvalue's picture

But China was not such a big buyer then. Besides that, China's reserve figure is a top secret. You don't know how much China had in its silos in 2002/2003. Therefore, the FAO numbers can be a bit misleading. So keep an eye on China. The Chinese can stop buying copper and iron ores but they can never stop eating.

EscapeKey's picture

China is part of the overall picture, and they can most certainly grasp Chinese imports and exports. A container ship doesn't just arrive and start offloading tons and tons of grains without paperwork.

eigenvalue's picture

China is part of the picture but it's a very vague part. You can check China's annual net imports of soya beans from 2003 to 2010 and see how China's demand explodes. China has 1.3 billion people but limited arable land. The Chinese have been using their limited land to build ghost cities. These lands can never be used for agriculture any more. So go long agricultural products and screw the Chinese!

EscapeKey's picture

It might be a vague part in terms of storage, but supply and demand will be known. And as for the storage picture, that point might as well favour my argument as yours. They could have increased imports to build inventory.

Ah well, enough of this. We'll just have to respectfully disagree.

nkktwotwozero's picture

So you think that it's not a fundemental supply/demand issue of food.

But more of a supply issue of money? Monetary policy causing food inflation?


What about an upcycle in the commodity cycle?

From 1980-2000 (approx, give or take a year on start and end), we had overall lower commodity prices.

Then from 2001-Now basically we've had increasing prices for ALL commodities.

We also came from (in 2000) off very low historic levels of prices.

It also marked the bottom of mass interest in investing in commodities.

What's your take on the argument that this is just money moving back into commodities?

Helped, obviously, by the extra-ordinary recent expansion in credit.

SilverDOG's picture

Control is exhibited with futures paper trade of food as well. 2002-2003

Paper to food commodity ratio is increasing.


sschu's picture

To eigenvalue and Escapekey.

Great discussion, very informative, thank you!!




Sudden Debt's picture

This morning my financial newspaper had headlines: CORNPRICES CRASH AFTER ALL TIME HIGH!

There wheren't any real facts, and I kind of thought I missed something.

That "crash" was not the kind of "crash" that I call a "crash".

It's not because a graph doesn't go up or down in perfect straight lines, that every movement should be reported.

If it would have said: WE WHERE FUCKED AND ARE STILL FUCKED! I think people would still read the article and the article would contain some truth and insight.

I really start to wonder why I pay 1.2 euro's a day for a newspaper that doesn't even contain a funnies page...


nkktwotwozero's picture

>for a newspaper that doesn't even contain a funnies page...

Every newspaper is the funnies in a world of farce.


Cognitive Dissonance's picture

Why don't they all just start feeding us artificially colored, artificially flavored packing peanuts and get this over with?

I'll take Bernanke Beriberi please.

johnQpublic's picture

....and when there was no craw-dad, we ate sand...

psychologicalmess's picture

 expensive to filter all that radiation out of food.  i was just checking jars of stuff i like to eat.  so much of it is from california.  

tomster0126's picture

All this talk about oil and no one really considers how our food systems are going to change over the next few decades!  this is only just the beginning...super inflation to come

Creepy Lurker's picture

Time to start growing your own, folks. Grow what you like to eat instead of buying it from California. No matter what your climate or soil, you can feed yourself.

Believe me, if I can do it with my brown thumb, you can too.

gall batter's picture

From "The Graduate":

Now, McGuire would suggest seeds.  

UninterestedObserver's picture

"International prices of oils and sugar contracted the most" On what planet did oil drop in the last 3 months? 

tomster0126's picture

The signaling of the and gas, probably the two most crucial things to survival in modern America, and more and more people can't afford to exist simply because of these prices.  I've never seen morale this low, not in years...