Soaring food prices will fall to earth again soon

Just two years after the most severe food shortages in 30 years, there are fears of another food crisis. The soaring price of wheat, with European prices up 80% this year, has sparked riots in Mozambique following the government’s decision to hike bread prices by 30%. The latest uptick came as Russia, a key producer, extended an export ban until the end of next year after the worst drought in over a century.

The wheat surge is the main reason that the UN Food and Agriculture Organisation’s (FAO) index of food prices jumped 5% in August to a two-year high. Its index of meat prices, meanwhile, has climbed 16% in a year to a 20-year high. That’s due to sustained demand from Asia and producers curtailing herds after a run of low prices.

US corn prices have reached a 23-month high. Hot weather has lowered harvest forecasts from record highs and demand for US grains looks set to rise following Russia’s ban. Cocoa also recently reached a 32-year high; coffee has just hit a 13-year high and cotton a 15-year peak. And, as in 2008, speculators are exacerbating price rises. The number of futures and options contracts outstanding in the cotton market, for instance, is up 42% since July, notes Gregory Meyer in the FT. But a rerun of 2008, for now at least, looks unlikely. Food prices are still around 30% below 2008 levels. And while food stocks were at 16-year lows last time round, supplies are higher now. The global wheat crop this year is set to be the third highest on record and stockpiles should be 40% above 2007-2008 levels. The EU or US could “easily cover” the Russian shortfall, says the FAO’s Abdolreza Abbassian. “There is no reason for this hype.”

Elsewhere, too, while the long-term outlook for agricultural commodities is positive, as we have often pointed out in MoneyWeek, there appears to be limited scope for further price rises just now. As far as coffee supplies are concerned, “we haven’t got a problem” in 2010/2011, reckons one London broker. And a 20% rise in US cotton acreage this year, along with the weakening global recovery, means cotton bulls “should make… cotton while the sun shines”, says Lex in the FT.