The record US, and global, summer drought has come and gone but its aftereffects are only now going to be felt, at least according to a new Rabobank report, which asserts that food prices are about to soar by 15% or more following mass slaughter of farm animals which will cripple supply once the current inventory of meat is exhausted. From Sky News: "The worst drought in the US for almost a century, combined with droughts in South America and Russia, have hit the production of crops used in animal feed - such as corn and soybeans - especially hard, the report said. As a result farmers have begun slaughtering more pigs and cattle, temporarily increasing the meat supply - but causing a steep rise in the price of meat in the long-term as production slows. "Farmers producing meat are simply not making enough money at the moment because of the high cost of feed," Nick Higgins, commodity analyst at Rabobank, told Sky News. "As a result they will reduce their stock - both by slaughtering more animals and by not replacing them." Somewhat ironically. food prices are now being kept at depressed prices as the "slaughtered" stock clears the market. However once that is gone look for various food-related prices to soar: a process which will likely take place in early 2013, just in time to add to the shock from the Fiscal Cliff, which even assuming a compromise, will detract from the spending capacity of US (and by implication global) consumers.
The cost of pork is expected to rise at the fastest pace - by 31% by the end of June next year - while beef costs could increase by up to 8%.
"This record cost of meat and dairy will combine with already-high crop prices to increase food prices by 15% by the middle of next year," Mr Higgins added.
This would see food prices reach their highest level on record, up by 175% compared to the year 2000.
But the report stressed that the current situation is very different to the crisis of 2008 – in which food stables of the world’s developing economies, like wheat and rice, were severely affected.
The bank's research follows official figures that showed inflation had slipped back to 2.5% in the UK - closer to the Bank of England's inflation target of 2%
But Mr Higgins warned that next year’s food price rise could push inflation in the UK higher, and so further away from the Bank's target.
And who will be the biggest loser once the market starts purchasing pork futures with both hands? Why the same country whose central bank resolutely refuses to join the global easing carnival, precisely for fears of what may happen to pork prices: arguably the most critical component of the Chinese inflation picture. Recall that when it comes to measuring inflation, not everyone is like the US, with a food weighing of just under 8% of CPI: India and China are far more susceptible to food price shocks, as the food component of CPI is 47% and 31%, respectively.
Furthermore, in China pork is by far the most consumed "red meat." A surge in the price of pork as global inventories plunge could well result in the kind of food protests that toppled various regimes in the MENA region in the spring of 2011. But don't worry: this too, like everything else, will be fixed by the central planners. After all, the VIX by then will likely be in the low-single digits at current rates of artificial volatility collapse, and all shall be well.