World Food Commodity Prices, Future Supply and Demand
As with other commodities, there has been a strengthening in food commodity prices over recent months and the long term trend suggests high prices will remain.
Some commentators suggest the surge in food prices is due to the actions of traders and speculators in the grain futures markets and that these activites have a serious impact on the livelihoods of people in developing countries.
The grain futures markets, however, are only reflecting the hedging and trading activities of firms and individuals when they look to protect their positions from changes in food commodity prices.
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There are many reasons why the price of grain futures or livestock futures can change in a relatively short space of time.
There is a steady trend of increased demand for food, and this is coming from the emerging economies of Asia led by India and China.
Jim Rogers, whose Rogers International Commodity Index (RICI) tracks world commodity prices, believes food inventories are at 60 year lows, and that this explains the strengthening in food commodity prices.
Recently Bob Zoellick, President of the World Bank has warned that 100 million people are being forced into malnutrition and hunger and over 30 developing countries face potential social unrest unless the developed countries take decisive action.
The World Food Programme, the largest food aid distributor in the world, is also affected and has difficulty raising the necesary fund for its operations.
And the UN is holding a Food Summit to discuss the growing crisis in world food, yet questions have to be asked if the funding by these multilateral organisations is being put to best use. Demand and Supply Imbalance
The UN Food Prices Index is a key measure of how world food prices are moving and this shows a big rise since 2007 but in April 2008 it has actually fallen after reaching a plateau in March which was a record high point.
Wheat futures prices have been going very strong over this period but they have fallen back a little recently from the February 2008 peaks, though still over double the 2006 price.
A look at soybean futures shows that this is another indicator being affected by serious disputes over taxation in Argentina, one of the top four nations in the world for soybean production.
And then there are corn futures, the prices of which are being affected by the competition between food needs and alternative fuels such as biodiesel from ethanol.
The increase in food demand comes from preferences for new diets which include meat and dairy products. And that demand in turn increases a demand for grains and oilseeds.
The US Department of Agriculture (USDA) says that since 1990 the annual growth rate in grain and oilseed production has fallen from 2.2% per annum (average between 1970 and 1990) to 1.3% per annum.
And the USDA projection for the period 2009 to 2017 is for only 1.2% per annum growth rate.
Food Commodity Crisis
The Future of Food Prices
The three main themes that will dominate the issue of food commodity prices going forward are:
While the UN wants its member nations to co-operate on these challenges, it seems that governments could do more to reduce tariffs and subsidies to farmers in developed nations.
One area where there is significant room for reform is the European agricultural system called CAP.
Food commodity prices will also remain high for so long as crude oil prices are strong given the role of oil in almost all human activities, not least agriculture.
Grain futures and livestock futures and the funds which reflect them such as ETF’s, will remain a reliable barometer of where world food prices are moving for the forseeable future.
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