Can markets curb ‘agflation?
And now a new term – agflation — has been coined by global financial services group Merrill Lynch to capture the phenomenon of world food prices forcing up consumer prices more generally.
It has come about as persistent and continuing rises in food prices are now seen as posing problems across the world. Some experts believe this could rival global warming as the biggest single concern on the planet.
Corn prices are at 10-year highs, pushing up the cost of feed for livestock and therefore meat as well. Wheat and dairy prices are also up across the board.
The implication for global growth is potentially serious if the inflationary threat convinces central banks to set interest rates at higher levels than they would otherwise do.
Yet, as Merrill Lynch analyst Jose Rasco explained, it is not surprising to see food prices putting upward pressure on overall inflation.
For there are expanding constraints on food supply, a changing demand for food and the entrance of the energy business as mass consumers of food products as reasons.
Some analysts now argue that a steep climb in the cost of food worldwide in recent months could be permanent, or at least long lasting.
Hot, dry weather in many parts of the world augurs poorly for this year’s harvest. That’s accepted as seasonal volatility, but there are also shifting demand and supply patterns, which could amount to structural change.
Demand for agricultural goods has spiked because of the fast developing bio-fuels industry and rising standards of living in China as it continues to surge economically.
And, unlike past periods of rising food prices, farm experts say there is less spare capacity of cultivatable land.
Some analysts are confident, however, that the agricultural market will respond to the incentive of higher prices and begin to produce more, putting a lid on agflation.
But there is also a possibility that World Trade Organisation member states, anxious to minimise the effects of agflation, might now push ahead with a global trade agreement that would have a negative impact on European agriculture.
The issue is likely to be discussed by leaders of the G8 group of industrialised nations, Britain, the United States, Germany, France, Italy, Japan, Canada and Russia, which began their annual three-day summit in the German resort of Heiligendamm yesterday. However, the recent rise in world commodity prices, particularly for cereals and oilseeds, must be put into context of the recent past.
World prices have been at rock-bottom levels over the past two decades. It has been a bad time for food producers in both developed and developing countries.
Greater forces such as high energy prices, global warming and population growth are now clearly impacting on world commodity prices, according to Con Lucey, the respected chief economist of the Irish Farmers Association (IFA).
He said high energy prices and the inevitable decline in fossil fuel supplies means that some land resources are shifting from food production to the production of renewable energy.
Gobal warming is resulting in a decline in the production capacity of agriculture in the warmer regions of the world, which will include the southern countries of Europe. Water is becoming a limiting resource across huge regions of the world.
Population growth is continuing, particularly in Asia. The combination of substantially more consumers and higher incomes means that much of Asia and the Middle-East will never be self-sufficient in food.
“The emerging new economic order in world commodity prices is clearly positive for producers in all regions of the world. But the perceived negative impact on inflation should not be exaggerated,” he said.
Mr Lucey said that while inflation in Ireland overall increased by 5.1% in the 12 months to April, food and soft drink, which accounts for 11.7% of the index, increased in price by only 1.6%.
In contrast, the price of services, which taken together account for 53% of the index, increased by 9.1%.
“Why is there no outcry about this,” asked Mr Lucey, posing a question that is surely worthy of public discussion.
