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Thursday 20 January 2011

New age of intervention in food prices

Worries over food prices are gathering pace and triggering alarm among politicians across the world. For there is nothing more likely to bring down a government than ignoring starving citizens.

New age of intervention in food prices
Food prices are set to become an increasingly politicial issue. Photo: HEATHCLIFF O'MALLEY

In India, people are upset about onions. Expensive cooking oil is causing hoarding in China, a practice banned by the government. Meanwhile, flour and bread are the main source of riots in Algeria and now Jordan.

Worries over food prices are gathering pace and triggering alarm among politicians across the world. For there is nothing more likely to bring down a government than ignoring starving citizens, as Marie Antoinette found to her cost during the French Revolution and the Tunisian ruler found this week when he was toppled by rioting protestors.

Rice, the main food of most Asian countries, is seeing relatively stable prices thanks to good harvests from Thailand. It is countries reliant on wheat, the biggest global staple, that are likely to see the most civil discontent, especially in Africa.

Ironically, global stockpiles of wheat are higher than they have been in years, despite the fact that the price has hit a record of more than £200 per tonne in London, having risen 90pc during last year.

Part of the problem is that the food isn't going where it's needed. And partly futures prices are rising on fear of supply shortages to come.

Erin FitzPatrick, an analyst at Rabobank agricultural research, says worries about unpredictable weather and wheat's link to corn prices have been driving the peaks.

"We've seen pretty much across the board a dip in production and a lot of that is weather-driven," she says. "But with the demand side of the equation and economies coming back to life, forecasts are still positive.

"With wheat it's fundamentally not that bullish. If you look back historically we're seeing some of the highest stock levels in a while. But there's a number of things at play. Generally prices of corn and wheat tend to move somewhat together because you can choose to plant one or the other."

Corn is the agricultural commodity expected to rise the most this year and is already more than $6 (£3.78) a bushel – the highest level since the financial crisis. It has increased by 67pc, as China started importing the grain for the first time in years and crops failed in bad weather.

Farmers have therefore decided to plant corn because the price is higher, causing a drop in available acreage for wheat.

"The second thing is weather events in wheat so the availability of exports is just not there," says Ms Fitzpatrick. "There's a risk from La Niña [the climate pattern] in South America and some of the forecasts from the US still look overstated. The story is that production levels are dipping quite dramatically."

It's not just corn and wheat that are soaring. When the price of grains begin to rise, the cost of feeding animals does as well. Prices for cattle, pork bellies and lean hog futures are up between 19pc and 26pc, with farmers reporting a 20-year peak.

The squeeze is only likely to continue with increasing demand for better lifestyles, including more meaty diets, from Asia and other developing regions.

More extreme weather and increasing demand from a growing global population are two big underlying factors. But it's also linked to the high price of oil, used in transporting almost every commodity in the world, and manufacturing fertiliser.

One consequence of fears about food prices is the likelihood that governments will start to get more involved in the market.

Ms Fitzpatrick says: "We have seen a muted re-emergence of world governments intervening in agricultural markets this year. Further supply shocks may see a return to widespread government intervention in 2011."

There will also probably be a closer look at the role of financial trading in soft commodities, especially exchange-traded funds that hold physical stocks of food that could be used to feed people rather than as an investment asset.

Charles Robertson, global chief economist at Renaissance Capital, says: "Speculation certainly played a role in 2008. Traders who'd never touched soft commodities bought into the argument that the global population is growing and people are eating more meat and the story that surely we'll run out of food. One thing we can be sure about is that the debate over food prices going to get more ideological."

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