Brace for higher food inflation

Dennis Morrison, Columnist

According to the United Nations Food and Agriculture Organisation (FAO), its world food prices index rose by 32 per cent between June and December last year, raising fears that poorer food-importing countries could be hit by a crisis similar to that of 2007 and 2008.

During that period, high oil prices, growing food demand and tight supply precipitated by poor harvests in some regions, escalated prices to levels that forced countries with limited hard-currency reserves to curtail food imports.

This, in turn, led to food shortages that sparked riots in several countries, including Egypt, Cameroon and Haiti.

In Jamaica, consumers were bombarded by hikes in the prices of staples - flour, bread, rice and cooking oil.

These hikes, combined with the uptick in the prices of domestic food crops, arising from hurricane-related disruption to local production in 2007, to set off a surge in the inflation rate to 16.8 per cent that year, almost triple the rate in 2006.

As oil and food prices peaked in 2008, cost-of-living pressures persisted with the inflation rate remaining at the same elevated level.

Generally, world food supply conditions are now more favourable than during the crisis and African countries, in particular, had good harvests last year.

As a result, their reliance on imports has eased. In particular, global supplies of rice and wheat are healthy, but continued stability will depend on the strength of this year's harvests in exporting countries.

Already, the heavy rains in Australia have disrupted the wheat harvest there, leading to a reduced crop and there are also concerns about production in Argentina, another important producing country.

While the FAO's food-price index has escalated, the prices of individual items that are critical to the Jamaican diet are still below their peak levels of 2008.

The upward pressure on commodity prices is, however, gathering momentum due, in great measure, to the high liquidity in the world financial system flowing from the monetary easing by leading central banks.

With capital markets awash with money and interest rates at record low levels, traders have been increasingly investing in futures in commodities, thereby bidding up prices of metals, as well as major food crops.

The topsy-turvy movement in food prices is illustrated by looking at what has been happening to the prices of corn, wheat, rice and soya bean oil. At the height of the food price crisis in 2008, the price of corn reached US$281 per tonne (fob) at US Gulf ports in June, up from US$206 six months before, an increase of 36 per cent.

By December, the price fell to US$150 or by 47 per cent, as the financial meltdown sent the global economy into recession and consumer demand was squeezed.

It remained pretty stable in the US$150-160 range up to July 2010, but took off again in August to reach US$247.70 by December 2010, a jump of nearly 50 per cent in five months.

Wheat prices have shown high volatility as well over the similar period, climbing to a high of US$482 per tonne in March 2008 before collapsing to US$ 240 by December 2008 and falling further to US$183 in June 2010.

Thereafter, they shot up and at the end of December 2010 stood at approximately US$320 per tonne, an explosive 75 per cent increase.

Movements in the benchmark prices for rice followed a similar pattern with prices going up to a peak of US$985 per tonne for 'US long grain milled' in July 2008 or 81 per cent above their January levels, and then plummeting to US$683 by December 2008.

Prices reached their lowest point in August 2010, but by December 2010 they raced to US$600, a rise of 36 per cent in only four months.

The warning signs of food inflation pressures are clear, and were oil prices to get up to the US$100 mark predicted by some observers Jamaican consumers will feel the pinch.

Indeed, motorists are seeing gasoline prices exceed the highs of 2008.

business@gleanerjm.com