Temporarily at least, the world seems to have weathered a decade-old crisis in food production, with stocks of the major grains except for corn rising to levels not seen since 2002 and 2003.
Combined with that, as Asia Sentinel reported in November, investment banks, hedge fund and money market managers have been forced by Eurozone financial crisis and other global economic problems to witdraw funds out of speculation in commodities – a process that came to be known as “financialization” and which over the past 10 years turned commodities trading into something resembling a casino.
The French government has prohibited financiers from speculating in food commodities. Funds invested in commodities by speculators rose by 195 percent between the fourth quarter of 2001 and their 2011 peak, acting as a catalyst to drive commodity prices to record levels. The hot money has flowed back out, calming into price volatility. It is uncertain at this point when the big-money players will regain enough equilibrium to attack commodities again.
In the meantime although prices remain uncomfortably high, “the improved supply outlook resulted in declining prices during the second half of 2011 with a sharp fall in December,” according to a World Food Brief released by the United Nations Food and Agriculture Organization in early February.
The increased supply should ward off concerns by the FAO, the World Bank and other organizations that starvation is around the corner for millions of the world’s poor, and should alleviate global inflation concerns to some extent. Poorer countries, in which families spend as much as 50 percent or more of their income on food, are hit particularly hard by food inflation. The World Bank, in its Feb. 2 World Food Price Watch, reported that global prices fell sharply, by 8 percent between September and December 2011, with wheat, maize and rice prices down because of improved supply conditions and concerns about the health of the global economy.
There is scope for setbacks. Grain prices rose 1.5 percent last week on uncertainty about crops in South America and abating concerns over the Greek government’s debt problems. Wheat was up by 3 percent on the week as the macroeconomic climate improves.
As food prices have skyrocketed over the past several years, new land has come into production and farmers across the world, particularly in South America and in parts of Africa, have responded by planting bigger crops, bringing down the FAO’s December Food Price Index to its lowest level in 17 months.
Soft commodity stocks-to-use ratios in 2011/12 are averaging 27.6 percent across the main soft crops, according to Research-Works, a Shanghai-based research firm that specializes in commodities. “There will always be isolated supply disruptions but we now have a big enough buffer to manage the shocks, with the exception of corn,” according Research-Works 23 February Commodities Monitor. Robust demand growth, largely driven by emerging economies, “for a time overwhelmed supply, pushing up supply,” the report said.
Consequently in the past two years global farmers have responded, and in force, driving the average stocks-to-use ratio back up to 28.9 percent, according to the Commodities Monitor, which adds that current prices suggest a large increase in plantings ahead for summer 2012, which should help to begin rebuilding global stocks. On balance global soft commodity stocks are at comfortable levels although corn stocks are at very low levels despite record plantings because so much corn is going into the production of ethanol to mix into gasoline.
The weather is the wild card, as it was last year, when devastating fires in Australia and Russia, floods in Pakistan and China and other weather events combined to cut into crop production. According to a Feb. 24 article in Scientific American, “a 2C increase in temperature — the anticipated rise from climate change in the next 40 years — is roughly equivalent to a 500-meter change in elevation, he said. Farmers growing at an elevation of 1,500 meters will need to move crops up to 2,000 meters.” That means tropical farmers in lowland areas will face serious dislocations. It may well mean that crop bands move away from tropical regions and that colder climates will become the home to new crops. Climate scientists are still seeking to determine the effects.
“There will always be floods and droughts in individual locations but we now should have a big enough buffer to manage the shocks, with the exception of corn,” according to Research-Works.
Two demand shocks combined to drive up soft commodity prices over the past decade. Nonetheless, since 2004 stocks have been rebuilt to more comfortable levels in both wheat and rice, reducing the upward pressure on prices and leaving the world in better position shape in regard to grains generally.
The first demand shock was driven by the increase in demand from the developing world, particularly China and India, which fortunately had relatively extensive stocks on which to draw. Rice and corn stocks also fell sharply in both countries although they have since been rebuilt.
The second demand shock was created by European Union and US biofuel mandates that required 16 percent more global corn area and 11 percent more soyabean area from 2004-11 to satisfy petroleum production quotas. Areas planted in cotton shrank by 15.6 percent between 2004 and 2009 before recovering back to 36 million hectares in 2011.
That, according to Research-Works, resulted in a 170 percent rise in cotton prices in just the six months prior to March 2011. Because of the land diverted to corn production, the prices of the five main soft commodities – wheat, corn, rice, soybeans and cotton – rose by 127 percent between 2004 and 2011.
The value of world trade in soft commodities has almost quadrupled since 2000, up from US$35.4 billion to $133 billion last year.
“As prices come down we think the value of trade should fall for a few years, though volume growth may be a partial offset,” Research-Works reported.