Food Prices could rise higher in future

These days, agriculture seems to be attract my attention quite a bit. I read this speech from Alan Bollard, Governor of Reserve Bank of New Zealand where he talks about agriculture and rising commodity prices.

The reason for rising prices is partly China. He adds:

The rapid pace of industrialisation of China, coupled with its relatively low per capita endowment of natural resources, has led to a sharp increase in world commodity demand. For example, according to the International Monetary Fund, China was responsible for 51 per cent of the growth in the world copper market from 2002-2005, 54 per cent of the increase in the steel market, 48 per cent of aluminum growth and 87 per cent for nickel.

However, what caught my eye is this:

The most marked increases have been in dairy prices. Over the last year, dairy prices have increased by 73 percent. Milk powder prices have led the way, rising almost twice as fast as other dairy products.

Why prices have increased?

In large part, the recent gains in dairy prices can be traced back to a basic imbalance between global demand and supply. Global demand for protein has been on a structural uptrend for some time. Demand for protein is very income sensitive and rising income levels in emerging markets have led to improvements in diet, incorporating more meat, eggs and milk. In recent years, the strongest growth in consumption of dairy products has come from emerging Asian markets, particularly China.

Why Supply hasn’t caught up:

1) At the same time, dairy production from the major exporting regions, such as New Zealand, Australia and the European Union (EU), has been relatively lacklustre, hampering the ability of global dairy supply to meet the growth in demand.

2) The recent boom in biofuel demand has further hindered global dairy supply. Strong demand for ethanol has seen corn prices, the primary source of livestock feed, advance over 50 percent in the past six months.

The outlook for future is prices could rise further:

There is certainly no compelling reason to suggest that strong global demand for dairy products will slow markedly soon. Supply responses in dairy are slow inevitably slow. And with the boom in biofuel demand sending production costs in many parts of the world soaring, the ability of supply to “catch-up” to demand will be constrained further. As a result, any increase in global dairy supply may well rest on the prospects for emerging exporters such as Argentina and the Ukraine, along with the ability of China to increase production to meet its own demand. It is certainly possible that we could be heading into a “new era” for dairy prices.

He then goes on to talk about impact on NZ economy (a good snapshot). But the graphs etc presented are very good. Thanks Mr. Bollard.

Update 1:

I just checked the above mentioned food prices in India. (The website of Office of Economic Advisor (under Ministry of Commerce and Industry) provides detailed analysis of the Wholesale Price Index , the most popular measure of inflation in India). Here are a few findings:

1. From March 2006 onwards foodgrain prices (cereals and pulses) have been increasing in double digit every month vis a vis same month pervious year ( i.e. comparison is between March 2006 and March 2007 and so on).

2. Poultry Products ( Eggs, Meat & Fish) saw double digit growth rates from July 2005 onwards to June 2006. And now again from Feb 2007 there is an increase in the index .

3. There has been a huge jump in prices of milk powder when we see double dogit increase from March 2006 onwards but the index has not increased, hence it is basically more of base effect. The prices are not incvreasing but when we see the year on year growth the numbers are in double digits.

So, bit of a mixed story. But yes we see quite similar trends in India as shown by Bollard in his speech. Keep watching this space for developments.

Update 2:

Apurv rightly asks:  “Well, dairy products price rise is understandable based on your post. But how is it just possible to generalize it to include all food products? Confused a bit..”

My apologies for missing out that point. The dairy products are consumed by themselves and are also used to manufacture other food products as well. For instance cakes (eggs, cream) , Processed Cheese (milk), Salaamis (meat) etc all need some form of dairy/poultry items.

Thanks Apurv once again.

4 Responses to “Food Prices could rise higher in future”

  1. Apurv Says:

    Well, dairy products price rise is understandable based on your post. But how is it just possible to generalize it to include all food products? Confused a bit..

  2. Amol Agrawal Says:

    Well, you need to read the speech by Alan Bollard. Dairy prices are important for NZ economy and hence the focus but overall most of the prices related to food have been increasing. The prices of basic food stuff like wheat, rice etc have been increasing. And yes I forgot to mention most of these poultry items are used quite a bit in food products—for instance biscuits use flour, milk etc., cakes use eggs, cream etc., and so on and so forth. Thanks for the same. I will add that as the update.

  3. Assorted Links « Mostly Economics Says:

    […] 3. In ET Ruchir Sharma raises concerns over rising food prices. I raised similar concerns sometime back here. […]

  4. Rising food prices and inflation « Mostly Economics Says:

    […] food prices and inflation I had posted on the issue of rising food prices earlier as well. That time I had said they might rise now it is […]

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