Lower Food Prices Will Help Asia's Poor

The news earlier this week that billionaire hedge fund manager George Soros had dumped nearly US$800 million in gold ought to be a signal, if any were needed, that barring major weather disruptions the massive rise in commodity prices that has taken place since mid-2009 is really over.

For the hundreds of millions of people across the world who survive on less than US$2 a day, that should be enormously welcome news, although at the moment prices have more levelled off than fallen steeply, according to the Commodities Research Bureau index. They may well come down more sharply, with economists forecasting a deep correction in commodity prices over the next three months.

It is good news for several governments in the region, particularly Indonesia, Thailand, the Philippines and Malaysia, all of which subsidize a variety of commodities. With elections looming in both Thailand and Malaysia, the slowdown in commodity prices means encouraging news for their treasuries and incumbent politicians.

Partly the slowdown is driven by world economic conditions, although the breaking of bubbles, as in gold and silver, has discouraged speculators who are following Soros out the door.

“Quite often, despite explicit evidence, investors will act counter to the best possible course of action for fear of not being part of the ‘group,’ difficulties in admitting their mistakes or because they have led themselves to believe in a certain outcome,” said Sean Darby, chief strategist for Nomura in Hong Kong. “How investors deal with the problem of holding two contradictory beliefs ultimately causes ‘tipping points’ to arise in financial markets. Markets climb a wall of worry, but crumble as the herd changes all at once.”

The big question is whether the spike in crude oil prices, which was the catalyst for the original food shock in 2007, is also over, or whether continuing unrest in the Middle East might drive prices back up.

However, with the Eurozone and the United States still growing feebly, the economy in China, the world’s growth driver since the onset of the global financial crisis, is starting to moderate, with some important indicators flattening out – steel consumption, construction activity, domestic imports and non-energy-related commodities.

That break has followed a long, torrid year. Until March, global food prices increased in eight straight months, with prices of all commodity groups rising except for sugar, according to the United Nations Food and Agriculture Organization, which forecast that “In the face of a growing demand and decline in world cereal production in 2010, global cereal stocks this year are expected to fall sharply.”

That apparently hasn’t happened. In early May, the FAO reported that while global cereal supply and demand remain tight, especially for coarse grains, “production is expected to rise in 2011 as plantings expand, prompted by high prices, and as weather conditions return more to normal.” The FAO expects wheat production to increase by 3.5 percent, replenishing wheat inventories for 2011 and 2012. Rice output is also expected to rise by about 3 percent.

“Food prices may be high, but they are no longer rising – indeed, global agricultural indices have been flat since the beginning of the year and retrenched outright in recent weeks,” wrote Jonathan Anderson, the emerging markets economist for the UBS investment bank. “It is the latter trend that really matters for emerging economies.” The UBS economics team believes prices will continue to correct sharply over the next three months.

It could go on longer than three months. It is a question of how much those skyrocketing prices have been driven by nature and global population growth, and how much by the vagaries of the markets.

Both China and India forecast record grain harvests for the current crop year, with China announcing the eighth straight year of record harvests and India predicting an all-time record that should turn the country into a net exporter.

Global rice production also has been outpacing demand since the 2004-05 crop year, the seventh straight year of surplus production at a time when demand growth for rice has averaged only 1.1 percent annually over the past 10 years. Soybean production is expected to rise by 4.1 percent year on year as well.

In addition, driven by the rising prices, considerable new agricultural land is expected to come into production in Brazil, the Congo, Sudan, Angola, Columbia, Argentina and Bolivia, according to the FAO. Angola has large resources of fresh water and substantial unused land. Russia and the Ukraine still have 41.3 million hectares and 6.3 million hectares respectively that were taken out of production 20 years ago with the collapse of the Soviet Union. Central Africa, Kazakhstan and Australia all have surplus land for planting.

That doesn’t mean life is going to get much better for the world’s poor right away. Whatever the factors that led to the spike in prices, they have been very real. And prices to the consumer have a habit of sticking stubbornly in place as producers take advantage of falling wholesale prices to fatten their bottom lines.