The currently rally in grain and oilseed prices could affect supply chains, especially the animal protein industry, resulting in rising meat prices.
Right now, food inflation is weather-driven in exporting nations, mainly resulting from the US facing its worst drought since 1936 and water shortages in Russia and South America, according to Rabobank.
Record highs
With prices of agricultural commodities skyrocketing, it could result in “agflation” globally. As a result, food prices are likely to hit record highs next year.
The surge could well continue into the third quarter of next year. This would see feed-intensive crops coming under pressure resulting in repercussions for the animal protein and dairy industries, Rabobank said in a report.
Luke Chandler, Global Head of Agri Commodity Markets Research at Rabobank, said that this would lead to consumers, especially those in the lower strata, to switch over from animal protein to grains such as rice and wheat.
“These commodities are currently 30 per cent cheaper than their 2008 peaks. Nonetheless, price rises are likely to stall the long-term trend towards higher protein diets in Asia, West Asia and North Africa. In developed economies – especially the US and Europe – where meat and corn price elasticity is low, the knock-on effect of high grain prices will be felt for some time to come,” he said.
Grain shortage will be sustained since herds take a longer time to rebuild and also since the animal protein and dairy industries have long production cycles. This will result in pressure on food prices.
Since food makes up only a smaller portion of spending in emerging countries, the current period of “agflation” would not lead to unrest as was seen in 2008, Chandler said.
Better supply
The Food Price Index of the Food and Agricultural Organisation will increase by 15 per cent by the end of June next year. Prices will have to remain high to ensure demand is rationed and encourage better supply.
Rabobank says it expects prices of grains and oilseeds to rule higher for the next 12 months.
The situation could worsen on intervention by governments despite favourable macro-economic conditions, such as low growth, lower oils prices and a weak dollar, reducing the impact of higher food prices. Stockpiling and export bans are a distinct possibility during 2012/13 as governments seek to protect domestic consumers from increasing food prices.
Increased government intervention will encourage further increase in commodity and food prices in the global market, Rabobank said, adding that efforts to increase stockpiles will prove counterproductive at the global level.
This is because countries that are unable to pay higher prices could see greater food inflation soaring.
On top of these, global food stocks have not been replenished since 2008. This has left the market without buffer stocks to meet any adverse condition. Therefore, efforts by governments to rebuild stocks are likely to add to food prices and take supplies off the market at a time when they are most needed, the bank said.