Barclays Sees Grain Surge Sparking High Food-Costs Wave

The recent surge in grain and soybeans may spur a “third wave” of food inflation, following global price shocks that incited civil unrest in developing countries in 2008 and 2011, Barclays Plc (BARC) said.

Dry weather in the U.S. and the Black Sea region, a poor start to the Indian monsoon and the possibility of emerging El Nino conditions suggest there is “significant price upside ahead” for agricultural products, especially for wheat, corn and soybeans, Barclays analysts Kevin Norrish and Sudakshina Unnikrishnan said in a report e-mailed today. Corn has surged more than 50 percent since mid-June on the Chicago Board of Trade, while wheat is up 40 percent and soybeans rose 21 percent.

Countries such as Russia, Ukraine or Kazakhstan may introduce trade restrictions to ensure domestic supplies, Norrish and Unnikrishnan wrote. In the 2010-11 season, Russia banned grain exports for about 10 months and Ukraine limited shipments following drought, sending Chicago wheat prices up 47 percent.

“Watch out for the reintroduction of trade restrictions and/or a surge in import demand,” Norrish and Unnikrishnan wrote. “Export bans exacerbated each of the past two waves of food price inflation, though no such actions have been taken yet.”

Extreme Drought

Global food prices tracked by the United Nations have dropped 15 percent since reaching a record in February 2011, and are 10 percent below a high set in June 2008. Wheat, soybeans and corn are best performing commodities this year on the Standard & Poor’s GSCI Index of 24 raw materials. The GSCI’s agriculture index is up 16 percent this year, while the MSCI All-Country World (ACWV) Index of equities gained 4.5 percent.

Moderate-to-extreme drought covered 55 percent of the contiguous U.S. at the end of June, the largest area since 1956, the National Climatic Data Center said yesterday. The country is the world’s biggest exporter of corn, wheat and soybeans. The U.S Department of Agriculture slashed its corn harvest outlook by 12 percent on July 11 to 12.97 billion bushels.

Government downgrades to yield estimates “are not over yet,” Norrish and Unnikrishnan wrote today. Soybeans also may be “much more vulnerable to further supply shortfalls” because drought hurt production in the past season in South America, while China’s demand remains robust, they said.

Food Riots

Inflation in food costs triggered more than 60 riots worldwide from 2007 to 2009, according to the U.S. State Department. In 2011, high food prices in part led to unrest that toppled governments in Tunisia and Egypt, the world’s biggest wheat importer.

This year, corn importers in some Asian countries and large wheat users in the Middle East and North Africa “may soon be forced to buy” after holding off purchases recently in hopes prices would fall, Norrish and Unnikrishnan said. Still, global grain stockpiles are more ample than they were in the 2007-08 season, which may ease some pressure on prices, they wrote.

To contact the reporter on this story: Whitney McFerron in London at wmcferron1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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