Food inflation is the killer of all business cycles

[Lifer]

I read the following recently and am wondering how much economic sense it makes. I would understand that an increase in the value of food would stimulate economic growth in a lot of African Economies.



It is also important to remember that food inflation is beginning to run roughshod over many countries around the world. This is having a major impact in emerging economies, where food can represent 50% of disposable income or more. (Makes you realize that our holding out for higher prices impacts a lot of lives…)

Rampant food inflation is ultimately going to lead to economic damage around the world. If individuals are having trouble meeting their food budget, they certainly won’t be spending money on toys, cars or homes. If governments are spending big bucks trying to prop up the food supply, they have less money for other projects, or to pay back sovereign debt. No one wants to see riots over food - that’s a quick way to revolution. Ultimately, food inflation is the killer of all business cycles. This exposes ag commodities to the potential of a broad market selloff, much like the one we saw during the US banking crisis a few years ago.

[charliep]

I think this will be the big topic over the next 2 years. Not so much an issue in the developed world (North America, Western Europe, Australia, etc.) as we can adapt but rather the developing world (India, China, other parts S.E. Asia, Africa, Africa, Middle East, Former Soviet Union) where the issue will be higher expectations for a better future and political unrest.

[riders2010]

So are you saying we need to hope for lower prices so that other countries can develop? It's our responsibility for all the poor? Well for starters many amongst us farmers are the poor right here, many worked their asses off to end up with nothing except broken worn out bodies. It's time for everyone to realize if the rich capitalists would take a bit less out of their billionaire profits and pay some of those workers in those countries a decent wage instead of pulling factories etc. out of north america and move them to expooit those people over there, the biggest improvements for all of us and them would come.

[Lifer]

"So are you saying we need to hope for lower prices so that other countries can develop? It's our responsibility for all the poor?"

Thanks for responding.
It may be the way I posted that you may have misread what my understanding is and what the article is.

I understand that higher prices for commodities used in food could help African countries and other economies as well. The rural poor could grow food for profit.

Is food inflation a killer of all business cycles?

What our reponsibility is? That is another subject.

[bucket]

What is more annoying is these countries are generations older than North America and now we have to help them out.

Every year in africa there is a huge area flooded and the ecosytem depends on it. 100's of years and no one thought to build a dam or reservoir to maintain water throughout the area. I have no pity for these nations, since when a war comes along they can afford guns to protect their sand dunes. But can not afford to build infrastructure or buy food.

[charliep]

The issue will be expectations in the developing world for a better life (growth in China and India have demonstrated it can happen) but fears that everything will collapse and families will struggle to feed themselves. Fear makes people do strange things. The way to prevent is to improve productivity in the developing world so they are not relying on imports for basic food nutrition but this takes time/is impacted by other factors like social unrest/climate change but this takes time.

If you at the numbers, global inventories of grain are way down relative to use. Combine with just in time delivery and price volatility (those who can pay get) and you have have the potential for what is being talked about.

[charliep]

Perhaps the biggest fear as we go ahead will be the issue of hoarding. The selling function stopping in a rising market because of the expectations of higher prices down the road. Buyers wanting ownership of product (physical and futures) to protect themselves against a market that may go out of control. A speculative community that loves volatility almost as much as being long commodity. Most inflation indexes are heavily weighted to food and increases will be noticed almost instantly.

[furrowtickler]

2008 repeat ????

[charliep]

Not forecasting but realize the risk.

2008 was a different situation. Up to that point, strong financial markets (over valued I know) and $140/barrel oil. Then the bubble burst.

Today. Weak financial markets with the consumer/increasing confidence the one bright spot. Business not willing to invest because of risk although they do have money. Government - you fill that one in.

[charliep]

Will put this in for you to review. Don't know who this goofy guy is (likely a story that could be told) but his thoughts about the future.

[URL="http://www.marketprospects.usask.ca/"]market prospects[/URL]

[cottonpicken]

Love the topic but no time for thought except to
say ag productivity has been the base of all
empires. And god bless the iPad.

[wilagro]

Open minds??? With this bunch???

Ahahahahahahahahahahahahhhhaaaahaha

More like a posse in hot pursuit with their noose already formed and their rope a swingin'.

[furrowtickler]

Do you think the 'bubble' could burst with $100 - $120 oil with a weaker U.S economy this time? Lookin sharp as usual charlie - good interview btw.
Food riots give me an uneasy feeling as does 'food' inflation. Don't get me wrong I am optimistic as well and agree with all your points, I just would hate to see the rug pulled out from under us again. You are correct in that 2008 was different as markets went limit up for too long and this time a more stedy pace has evolved.

[bucket]

The reason we are where we are in 2011 is that price destruction in 2008 created demand. The demand is back and "just in time delivery" for food is proving to be a disaster. Saudi Arabia is building warehouses for grain. This time the supply is in question and grain prices should rise until the stocks are back to comfortable levels. Then the importing countries will re-evaluate how much they want to store.

Canola is a good example. 15 dollar canola in 2008 and since then demand has increased due to crushing plants coming on stream, the supply is borderline to meet demand. If statscan hadn't borrowed 700,000 tonnes from the 2010 crop to the 2009 production, where do you think canola would be today? As long as normal crop comes along in 2011 no one will miss that accounting statscan did for the crushing industry. If 2011 isn't near normal, effectively the bins are empty and the canola industry is going to be looking for imported canola or soybeans to crush.

[riders2010]

of course there are some open minds you know the ones if you looked through one ear you could see daylight out the other. Ha ha lol!