Agflation
2 06 2008I am in a business trip in Australia trying to convince my buyers that the price increases we are experiencing on vegetables are more part of an structural change rather than a cyclical phenomena. They are probably so tired of listening that, yes, prices are going up so they rather talk about something else hoping that the tune will change in the short term.
Once again I don’t think this is going to happen and some of the reasons that help me substantiate my belief that prices will remain on the high side for a considerable period of time are:
1) Crude oil has hit record prices of USD$135.00, this point needs no explanation, I think we all feel it when filling up our tanks with precious petrol. Remember oil is a limited resource, we can’t achieve unlimited growth with limited resources.
2) Energy Policies around the world. The agricultural output in the USA, Europe and Latin American countries has shifted to crops destined to the production of biofuels. So our farmers are now either competing against biofuel producers to get land to grow human consumption crops or have decided altogether to just plant crops intended for biofuels.
3) Worldwide inventories for basic soft commodities such as corn, wheat, soy bean and rice are at decades low. Part of why this has happened has to do of course with supply and demand however the fact that production subsides to farmers have been decoupled from production in the USA and Europe has played and important role in the reduction of inventories.
4) Global demand has also played an important role, the BRIC economies (Brazil, Russia, India and China) have experienced a rise in per capita income which has lead into changes in dietary habits. More and more Chinese are now going to restaurants such as the successful KFC and are eating more and more chicken. So how does this affect the global demand for grains in average you need 2 kilos of grain to produce 1 kilo of Chicken.
5) Climate Change. Prolonged Drought in Australia, the extreme harsh Chinese winter and the severe frost in Argentina and recent poor conditions in agricultural producing countries have resulted in a reasonable reduction in agricultural output. The scary thing here is that if we don’t do something radical to fight climate change things will not get any better.
At the of the day I think we all know prices are indeed going up since we are starting to feel it in our wallets. For us in living in developed economies this might force us to change some our habits like waiting a bit longer before we buy the new 108″ plasma screen however I challenge you to think about most of the people that live in 3rd world countries, for them the recent increases might mean skipping a meal and sometimes not eating at all.
This is a really serious matter, high prices and shortages have lead to riots in countries like the Phillippines, Haiti, Egypt and some African countries.
I do hope for prices to come down however I don’t have a clear answer as far as how this would be achieved, at least not in the short run.
