Thursday, September 29, 2011

Food Pricing Pressures

Hot dry weather is what is being blamed for the poor corn harvest.  But as the world’s population keeps moving toward that magical 10 billion mark- where it is supposed to level off – every little glitch in world production is getting to be bigger news.
Tom Polansek, Wall Street Journal, 9 September 2011
Global food prices remained near record highs last month, with concern growing that a disappointing U.S. corn harvest may trigger further increases, particularly in the developing world.
"Because the buffers are low in corn and we aren't seeing any recovery in inventory, this will keep the grains market on edge this year," said Abdolreza Abbassian, secretary of the FAO's Intergovernmental Group on Grains.
The report makes the very good point that within the United States, where people buy over half meals from restaurants, and a large portion of their grocery bill is for pre-packaged foods, the impact of grain costs is more muted than in countries that are living on the margin.  In the United States marketing, labor costs and transportation costs are also very much an issue.
The report highlights the difference in food-cost inflation around the world and in the U.S. The U.N.'s world food-price index for July was up 34% over a year ago, while the U.S. consumer-price index for food in the same month was only 4% above the prior year.
So unfurtunatly it is in the countries where people already pay the highest portion of their income toward food consumption, that prices will go up the most.
But even within the wealthy countries, the price of food quickly becomes an issue.  Even wealthy countries like the United States and Canada have people who have very little money.  If you have lost your job, and then your house, and your family is now living in your relatives basement, you too are likely feeling the pinch to put food on the table.
So while you would assume that most policies going forward would be very farmer friendly to increase the production of grains, that may not always be the case.  Just as we discussed (somewhere I think) the competing demands for water, there are competing demands within food production as well.
Mark Peters and Paul Vieira, Wall Street Journal, 9 September 2011
Thousands of Canada's farmers could soon be selling wheat and barley on their own. Here, a farmer harvests wheat Wednesday near Taber, Alberta.
The Canadian Wheat Board is poised to lose its monopoly grip on the country's wheat sales. Canada's Conservative Party captured a parliamentary majority this past spring, and newly elected government officials took that as a mandate to end the wheat board's reign.
The ripple effects from eliminating—or even weakening—the board's power would be widespread. Wheat prices, which already have experienced extreme highs and lows over the past three years, could become more volatile, some analysts say.
Not that the farmers are going to vote on the matter, but the vote is not binding on the Canadian Government.  And the Government has said that it will push ahead with eliminating the board regardless of the outcome.
What the wheat board does is control all the sales of wheat as a block.  It thus can negotiate with a power of considerable strength.  It gives a guaranteed payment to the farmers at the front end of the season, and then averages out all its sales over the year and pays out to the farmers by volume produced.  It is in essence a super coop.  Farmers have done them for years.  As always, there are always going to be a few farmers who feel they can do better on their own.  But in general a government guaranteed monopoly (to anyone) is a very strong position.
Abolishing it likely would bring down grain prices.  But would it yield more output.  With 10 billion people to feed it is output you need, and it is not as if there is no competition for grain in the world market.  The system simply insures that Canadian farmers will be better and more regularly paid then other countries with more ad hoc systems.  Likely there is more to the situation than the short article can address.  How, or if,  the Canadians prevent short term over production would also be the issue.
But the point is, that the issue discussed is price not over all supply.  This is particularly relevant because recent Canadian output has been down.


PioneerPreppy said...

Usually I can tell if it is going to be a good harvest or not within a few hundred miles (like last year). Yet this year I am not certain, it has been such an odd year. Although Missouri is not a major corn state we do produce a lot of it and the driers have been running in the silos but not as continuous as last year.

Gonna be interesting to see.

russell1200 said...

It has been an interesting year in too many ways. The cacaphony of crises has been astounding. The stock market had a complete collapse, and I just decided to let it go. Too many more interesting issues to discuss without putting spin on stock pricing.

Corn has drifted down (18% September):

But that could be as much because of people shifting to hotter trades, or getting out from under a margin call.