Food Inflation is Real, and It is Here

Food Prices Set to Explode This Winter

October 8, 2010

off-grid.net - Some recent headlines from the Financial Times:

• Corn price surges – Oct-12
• Soaring prices threaten new food crisis – Oct-08
• Raw materials index soars to two-year high – Oct-08
• Wheat and corn rise as Ukraine limits exports – Oct-07
• Shortfall drives tin to record high – Oct-05

Food inflation is real, and it is here. A comment from a recent reader’s post:

“Just yesterday I compared my receipt from a grocery run to prices I have from the same exact store from September 15, 2009. Bacon? Up 52% to $13.69 from $8.99 for 4 lbs. Butter? Up 73% to $9.99 from $5.79 for 4 lbs. Pure vanilla extract up 14% to $6.79 from $5.95. Chopped dried onions up a mere 2%, but minced garlic (wet) was up 32%.”

Defensive buying by investors worried about the inflationary effects of quantitative easing (QE) is behind the latest rise in gold, metals and food commodities to near record levels this week. Analysts have the usual litany of explanations: Chinese demand; plans for more QE from the Fed; a billion bushels of grain a year going to make ethanol….

As Agricultural commodities prices exploded again on Friday, threatening higher global food prices, US forecasters slashed grains production estimates after adverse weather damaged crops worldwide.

In Chicago, main agricultural commodities surged to daily fluctuation limits imposed by exchange rules, the FT reported. Traders, unable to use futures because of the daily limits, bid indicative corn prices to $5.60 a bushel in the options market, up 12.5 per cent. European wheat prices jumped by 10 per cent while the cost of other key commodities, including soyabean, sugar, cotton, barley and oats, also surged.

The agricultural rally, coupled with stronger oil and metals prices, propelled the Reuters-Jefferies CRB commodities index to a two-year high.

As livestock growers substitute one grain for another, a rise in feeds such as corn could trickle down to the staple grains relied on by the world’s poor. Chicago rice rose the maximum allowed to $13.295 per 100lb.

The US is the world’s largest corn grower and its exports make up the majority of global trade in the grain. The USDA had earlier forecast a record corn crop this year, but a combination of unfavourable heat and heavy rains forced a re-evaluation of yields.

Yet “every fiber in my body says yes, there are adequate supplies if we allow the markets to work — we will position these supplies in a way that will take care of the demand,” U.S. Grains Council president Thomas Dorr told Reuters in an interview.

The U.S. Agriculture Department on Friday jolted the world grain trade by cutting its estimate of the U.S. corn crop by another 3 percent to 12.664 billion bushels. That reflected a cut in average harvest yields to 155.8 bushels per acre, far below trade expectations of around 160 bpa.

That is still a sizable crop; the all-time high is 13.11 billion bushels, harvested a year ago. But corn demand has risen 12 percent since 2008, largely due to a billion more bushels of corn now being used to produce ethanol for fuel.

“My biggest concern is that people are going to start again finger pointing at the ethanol industry,” Dorr said.

Grain prices skyrocketed in 2008 amid tight world grain supplies. Food riots broke out in developing countries and worried governments hoarded supplies. But in the United States, the ethanol industry took flak for the price spike as the new player competing for corn.