Record Food Prices May Persist as Economic Growth Boosts Demand, IMF Says

Record worldwide food prices may remain high because the output response needed to ease supply concerns may take years, the International Monetary Fund said.

Increasing incomes in developing countries have boosted demand for meat and dairy, requiring more grain for livestock feed and land for grazing animals, Thomas Helbling, an adviser for the IMF’s research department, and Shaun Roache, an economist, wrote in an article. Rising demand for biofuels and adverse weather also have tightened food supplies, the IMF said.

“Over time, supply growth can be expected to respond to higher prices, as it has in previous decades, easing pressure on food markets, but this will take time counted in years, rather than months,” according to the article published yesterday in the agency’s Finance & Development magazine.

The global food price index, compiled by the United Nations’ Food & Agriculture Organization, surged to a record in February as all food groups except sugar rose, the agency said yesterday. Rising food costs and corruption sparked political unrest across North Africa and the Middle East, ousting leaders in Tunisia and Egypt, the largest buyer of wheat.

“There’s a risk that the current price spike could persist for longer than the 2007-2008 experience,” Luke Mathews, a commodity strategist at Commonwealth Bank of Australia (CBA), said in a phone interview from Sydney today. “There are more commodities involved in this current spike and that means it’s going to take longer to rebuild the inventories of all those back up to what we would deem safer levels.”

Futures Surge

Corn futures in Chicago surged 92 percent in the past year as rising demand for livestock and ethanol in the U.S. pushes the global stocks-to-use ratio to the lowest in 37 years.

Wheat jumped 65 percent in the past year after drought last year in Russia and Eastern Europe prompted countries to restrict exports. Dry weather curbed corn output in the U.S., and floods in Asia have restricted rice supplies, the IMF said.

Global inventories for all grains will drop 13 percent before the next harvest, the U.S. Department of Agriculture estimates. That’s the first decline since 2007. Surging food prices the following year sparked more than 60 riots from Haiti to Egypt. Increasing demand is causing isolated food shortages and accelerating inflation in developing countries even as it boosts farmers’ incomes and shifts planting strategies.

Rice Supply

While stockpiles will decline, supplies of rice, the staple food for more than half of the world’s population, may be sufficient to avert a repeat of the 2008 crisis, Abdolreza Abbassian, a senior economist at the FAO, said yesterday.

“Probably rice is the commodity which is separating us from a food crisis,” Abbassian said by phone. “I’ve never loved rice more than now.”

That may not be the case for long. The price of rice may advance as consumers seek cheaper substitutes for wheat, according to the International Rice Research Institute.

“If drought in China continues, that would affect rice lands and could adversely affect rice supplies,” the institute’s Director-General Robert Zeigler said in a Bloomberg Television interview today. Drier-than-normal conditions are expected across the North China Plain through next week, AccuWeather Inc. said in a March 3 forecast.

“Rice typically lags behind wheat prices by a few months,” Zeigler said. “As people substitute rice for wheat, that just increases demand” for rice, he said, reiterating comments that he made on Feb. 11.

Prices May Drop

Rough-rice futures gained 7.22 percent in the past year, trailing the jump in wheat, and almost erasing its premium to the rival cereal. At today’s prices, a ton of rough rice will buy 1.03 tons of wheat, compared with the average 1.3 tons in the past five years, according to Bloomberg data.

Global farm prices including wheat, soybeans and sugar may drop from next year as their advance prompts farmers to boost planting, potentially cutting record food costs, the Australian Bureau of Agricultural & Resource Economics & Sciences, a government forecaster, said in a report March 1.

The surge in food prices in 2008 was cut short after the global financial crisis pushed the world economy into recession and slowed demand, Mathews said. It will take the same “type of economic calamity” to curb demand for food enough to allow farmers to keep pace with production, he said.

Three-quarters of the global growth in demand for major crops in the past decade has been in emerging markets, according to the article. High food costs still have the biggest impact on developing countries, where consumers spend a greater percentage of their incomes on food, the IMF said.

Rebuilding Stockpiles

Food output will have to climb by 70 percent between 2010 and 2050 as the world population swells to 9 billion and rising incomes boost meat and dairy consumption, the FAO forecast. Producing 1 kilogram (2.2 pounds) of pig meat can take 3.5 kilograms of feed, USDA data show.

It will take at least two years of good harvests to rebuild food stockpiles that were drained after drought and excessive rains damaged crops in some of the world’s biggest exporting nations, Dominic Schnider, director for wealth management research at UBS, said March 2.

“The world may need to get used to higher food prices,” Helbling and Roache wrote. “Policy makers, particularly in emerging and developing economies, will likely have to continue confronting the challenges posed by food prices that are both higher and more volatile than the world has been used to.”

To contact the reporter on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net; Luzi Ann Javier in Singapore at ljavier@bloomberg.net

To contact the editors responsible for this story: Patrick McKiernan at pmckiernan@bloomberg.net James Poole at jpoole4@bloomberg.net

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