http://www.independent.co.uk/news/business/analysis-and-features/a-recipe-for-inflation-787936.html
A recipe for inflation
As the price of spring wheat soars on the American exchanges, the global
phenomenon of 'agflation' appears to be intensifying. By Sean O'Grady
Wednesday, 27 February 2008
In Pakistan, the prohibitive price of tea became an election issue; the
Chinese Communist Party's politburo frets about how long it may be
before its poor can afford to eat pork again; Mexican housewives have
rioted to protest the shortage of affordable tortilla; Swaziland is
facing famine, even as it exports cassava to feed the rich world's
hunger for biofuel.
Rising agricultural inflation, or "agflation", is a global phenomenon
that touches everyone, and almost every day it seems to intensify. This
week, the price of prime spring wheat rose by 25 per cent on the
American exchanges, while Russia and Kazakhstan announced fresh curbs on
exports to protect domestic supplies. On the Chicago Board of Trade, the
price of wheat has hit record highs of more than $12 a bushel. Since
2004 world food prices have doubled, and over the past year alone
agricultural prices are up by about 50 per cent.
For those in the developing world who spend their money on food and
little else, this is a matter of life and death. The United Nations'
Food and Agriculture Organisation says the rising price of cereals such
as wheat and maize are a "major global concern".
In the West, the damage caused by increases in the price of food is
damped by the costs of transporting and refining it into finished
products, and by the general prosperity of consumers. Hard-pressed
British farmers even regard current trends as a bonus. The large
supermarket chains and food processors are also doing their best to
resist the great food inflation. But agflation is making the lives of
policy makers more difficult and is hitting household budgets.
Yesterday's "producer price" figures in the United States confirmed the
clear inflationary problem faced in factories and food processing plants
– a leading indicator of what will soon be seen in the shops. Over the
past 12 months, producer prices rose 7.4 percent, the fastest pace since
October 1981. Food prices climbed 1.7 per cent, the most since October
2004. Crude food prices – that is, the input costs faced by US suppliers
– increased 2.7 per cent. The equivalent figures in the UK reported
recently were even more alarming: food prices up 8.5 per cent and input
food costs up by between 14.9 per cent (imports) and 36 per cent (home
grown) on the year.
Commodity price increases tend to feed on themselves, if that's an
appropriate expression. Oil-price hikes raise the cost of hauling crops
from continent to continent, especially some of the higher-end "cash
crops" the West has developed a taste for; mange-tout flown in from east
Africa is bound to become more pricey as the cost of aviation fuel
climbs, even if the underlying production conditions don't change.
Higher grain prices tend to push the cost of rearing livestock up. And
higher oil prices incentivise farmers to switch to biofuel crops, often
at the behest of nervous governments worried about the security of their
energy supplies.
Sharply escalating bills at the supermarket checkout fall into the
category economists call "high visibility inflation". The increases
themselves may not be so large in relation to the earnings of those
affected, but they make people feel poorer and make them sceptical about
official claims about subdued inflation. Thus they tend to increase
inflationary expectations, and pay demands.
Normally the West's central banks would nudge interest rates higher to
deal with such pressures, but the fragile state of the world's leading
economies makes such action tricky. Some – such as the US Fed – have
implicitly favoured a little more inflation over recession. Hence higher
inflation co-exists with slowing or stagnant economies. Rising food
prices are putting the "agflation" into "stagflation". How has it come
about?
Mercifully, some of it is down to temporary factors: freakishly bad
weather in east Asia, like the floods endured in the North of England
and West Country last year, will have a relatively temporary effect,
though the spikes in some prices look severe.
China has been badly affected by cold and rain, pushing inflation to an
11-year high of 7.1 per cent. Tomato prices are up by 138 per cent and
pork is 67 per cent more expensive. Reports yesterday that China's food
producing regions to the north were suffering from drought drove world
soya prices up again. India said yesterday that it may import two
million tonnes of grain after dry weather cut the harvest. Floods in
Mozambique, Zambia and Malawi have had a devastating impact.
All these situations should improve. The world should also be able to
count on an end to the tensions in Kenya that have crippled her output
of tea and cash crops. In the case of Zimbabwe, an historically
important source of food has long been stymied by President Robert
Mugabe's eccentric polices. These, too, may pass.
The immediate outlook – for the next year or so – is likely to stay
gloomy, though, because of the low level of world food stocks. The UN's
Food and Agriculture Organisation said that these are at record lows,
and any attempt to rebuild them will tend to keep food prices elevated.
World wheat stocks stand at about 157 million tonnes, against more than
200 million tonnes in 2003. US wheat stocks are projected to fall to
their lowest levels in 60 years by May. Speculators have noticed these
movements and have, unhelpfully, moved in on "soft commodities" as other
high yielding investment opportunities have dried up.
But even if crops and reserves recover, there are more worrying, long-
term influences at work that herald an era of permanently dearer food.
Most politically controversial is the diversion of crops to biofuel
production. The White House has been the most aggressive in its
promotion of bio crops, but others, such as the European Union, have
also set ambitious targets for the new technology. US production of
ethanol from corn has gone from 1.6 billion gallons in 2000 to 5 billion
in 2006. President George Bush has set an interim target of 35 billion
gallons for 2017 on the way to the administration's ultimate goal of 60
billion by 2030. Brazil and Indonesia are accused by their critics of
sacrificing food and biodiversity to bio-ethanol and bio-diesel. Should
we grow our biofuel crops in verifiable East Anglia or more efficient
South America?
Second, third and fourth-generation biofuels have a much greener impact,
but, despite sharply diverging claims, there is little doubt that
current biofuel policy is affecting food prices to some extent. Climate
change is another unknowable quantity that could transform everything
for the worse. But the most significant fact over the next few years
will be the economic growth of two of the world's most populous nations
– China and India. A combination of growing and more prosperous
populations demanding a more varied – often more meaty and less
efficiently produced – diet will likely price those in even poorer
nations in Asia and Africa out of food altogether. Teeming Bangladesh
will perhaps be the most notable loser, an impact exacerbated by rising
sea levels. A few nations – Argentina, Bolivia, South Africa – will
benefit from higher food prices because of the way their economies are
structured.
The obvious move the world's governments could make to alleviate the
pain of higher prices seems as distant as ever. The World Trade
Organisation's stalled Doha round of trade negotiations could radically
improve the workings of the world's food markets, but there is still
little sign of them reaching a consummation before November's US
elections, at which point a new administration will stall them for many
more months.
Genetically modified crops are another politically loaded option to
boost agricultural productivity massively; population control another
way of meeting the challenge. Demographics, biotechnology and the
climate will all profoundly affect the number of people in the world
with enough food in their bellies and the cost of our weekly shop. But
politics, one way or another, could do an awful lot to alleviate the
economic and human costs of agflation.
Agflation hits profits around the world
Kellogg
America's largest cereal maker said last week that "unprecedented
commodity and energy inflation" had forced the Michigan-based
trans-national to raise its prices. Its chief executive David Mackay
said the rises were "across our global portfolio and across almost all
segments."
Nissin Food Products
Japan's noodle champion saw shares slide by a fifth yesterday on fears
that higher palm oil prices, currently at fairly low levels, will
increase costs in the instant noodle business.
Associated British Foods
Says rising food prices will force it to raise another £150m in working
capital. But the Silver Spoon sugar and Twinings tea maker said it had
recovered higher costs.
Premier Foods
Shares are down 70 per cent in the last year as it tries to push a 6p
inc-rease in the price of a loaf of Hovis past the supermarkets. The
price of the average British loaf has risen from 74p a year ago to 82p now.
HJ Heinz
Beans means bucking the trend. The group said its food input costs had
risen by 7 per cent this year, but with little impact on profitability:
"Our plan is to continue pricing up and aggressively drive productivity
initiatives to offset escalating commodity costs in the industry."
Danone
Producer of Actimel and Cow & Gate. The group said it had recorded extra
costs of €40m last year and anticipates the same figure in 2008, with
the burden already absorbed by previous price rises. It gave a general
figure of 5 to 10 per cent for the price rises implemented in recent months.
Wednesday February 27, 2008
Biofuel demand to push agri commodities prices higher
KUALA LUMPUR: Strong demand for biofuels will be the catalyst driving
prices of agriculture commodities higher.
Singapore-based Frost & Sullivan director, global consulting Chris de
Lavigne said the global supply tightness in oilseeds this year would
take years to balance while the world market continued to look for ways
to grow more crops, especially for bioethanol production.
He said 2007 was the year of the domino with crude palm oil (CPO)
becoming a major beneficiary, given the tight supply of soyoil following
increasing corn usage in the US for ethanol and soybean for biodiesel
production in Latin America.
"I believe for CPO to hit the RM4,000-per-tonne level will be quicker
than what we think," de Lavigne said in his paper Will biofuels continue
to influence high vegetable oil prices? at the Palm and Lauric Oils
Conference 2008 yesterday.
He said it was a reality that CPO was now trading at US$1,000 per tonne
compared with just a forecast made in May last year.
Another speaker, Carotino Sdn Bhd executive director U.R. Unnithan said
palm-based biodiesel would still be the most cost-effective diesel
substitute in a free world market.
"Based on local data and practices, palm biodiesel stands out as an
excellent environment-friendly fuel in terms of energy efficiency, green
house gases emission reduction and sustainability issues," he said in
his paper Palm biodiesel the cost-effective environment-friendly fuel.
Unnithan said palm, as a raw material, offered the best yield
improvement potential, thus alleviating the food-versus-fuel problem.
On the current status of palm biodiesel projects in Malaysia, he said
there were 15 plants on the ground from 92 licences issued with many
unable to operate due to negative margins.
Major market distortions affecting palm biodiesel include the
US$300-per-tonne tax credit on exports out of the US, CPO export tax out
of Indonesia creating artificial CPO subsidy for biodiesel production,
import duty of 4.6% on Malaysian palm biodiesel into the US and the
weakening US dollar which erodes further margin for palm methyl ester
producers.
Source:
Coconut oil prices to double in FY09 on rising demand
27 Feb, 2008, 0010 hrs IST, REUTERS
Write to Editor
KUALA LUMPUR: World coconut oil prices are expected to trade around
$1,100-$1,300 per tonne in 2008-09, nearly double the same time last
year, lifted by surging appetite for the tropical oil as palm and soya
oil surge, a leading industry analyst said on Tuesday.
Rising world demand will more than offset a modest increase in output in
Indonesia and Philippines, the world's largest producers, said Romulo
Arancon, executive director of the Asian and Pacific Coconut Community.
"A slight increase in production may eventually help ease up the tight
supply," Arancon said in a paper prepared for presentation at a
three-day global palm oil conference.
"But the anticipated sustained demand for coconut oil would enable the
price to remain high or rise further, buoyed by other factors such as
spillover support from high demand of other vegetable oils," he added.
Coconut oil competes with palm kernel oil for the same products ranging
from margarine and detergents to biofuels.
Coconut oil for March-April delivery in Rotterdam is currently priced at
$1,460 a tonne, cost insurance and freight, analysts said. Prices the
same time last year were hovering around $765 a tonne.
Palm kernel oil stands at a 6.5% discount to coconut oil, quoted by
sellers at $1,364 a tonne.
High import demand from food sectors in markets such as China, the US
and the EU countries will keep prices buoyant, along with an increased
industrial use for tropical oil in these countries, Romulo said. He
estimated total world coconut oil shipments would increase to 1.9
million tonnes this year, up 4.2% from 1.8 million tonnes in 2007.
Philippines coconut oil exports are expected to dominate the market for
the first half of 2008 at 460,500 tonnes, while Indonesia's sales will
stand at 356,800 tonnes, Romulo said.
World coconut copra production — the dried coconut meat from which oil
is extracted — is expected to increase by 5.8% to 10.9 million tonnes in
2008, from 10.3 million in 2007, supported by favourable weather in the
Philippines. "Coconut palms in the Bicol region of the Philippines will
have slowly recovered from the strong typhoon that hit the area in the
last quarter of 2006," Romulo said.
A slew of typhoons crashed into the country's north-eastern
coconut-growing areas late in 2006, smashing trees and cutting exports
45% in the first two months of last year.
Source:
http://biz.thestar.com.my/news/story.asp?file=/2008/2/27/business/20454439&sec=business
Wednesday February 27, 2008
Biofuel demand to push agri commodities prices higher
KUALA LUMPUR: Strong demand for biofuels will be the catalyst driving
prices of agriculture commodities higher.
Singapore-based Frost & Sullivan director, global consulting Chris de
Lavigne said the global supply tightness in oilseeds this year would
take years to balance while the world market continued to look for ways
to grow more crops, especially for bioethanol production.
He said 2007 was the year of the domino with crude palm oil (CPO)
becoming a major beneficiary, given the tight supply of soyoil following
increasing corn usage in the US for ethanol and soybean for biodiesel
production in Latin America.
"I believe for CPO to hit the RM4,000-per-tonne level will be quicker
than what we think," de Lavigne said in his paper Will biofuels continue
to influence high vegetable oil prices? at the Palm and Lauric Oils
Conference 2008 yesterday.
He said it was a reality that CPO was now trading at US$1,000 per tonne
compared with just a forecast made in May last year.
Another speaker, Carotino Sdn Bhd executive director U.R. Unnithan said
palm-based biodiesel would still be the most cost-effective diesel
substitute in a free world market.
"Based on local data and practices, palm biodiesel stands out as an
excellent environment-friendly fuel in terms of energy efficiency, green
house gases emission reduction and sustainability issues," he said in
his paper Palm biodiesel the cost-effective environment-friendly fuel.
Unnithan said palm, as a raw material, offered the best yield
improvement potential, thus alleviating the food-versus-fuel problem.
On the current status of palm biodiesel projects in Malaysia, he said
there were 15 plants on the ground from 92 licences issued with many
unable to operate due to negative margins.
Major market distortions affecting palm biodiesel include the
US$300-per-tonne tax credit on exports out of the US, CPO export tax out
of Indonesia creating artificial CPO subsidy for biodiesel production,
import duty of 4.6% on Malaysian palm biodiesel into the US and the
weakening US dollar which erodes further margin for palm methyl ester
producers.
--
Check for earlier Pacific Biofuel posts: http://pacbiofuel.blogspot.com/
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