Food inflation will end very soon

Rampant food inflation in Asia, blamed for undermining social cohesion and prompting monetary tightening that threatens to choke the world economic recovery, is almost yesterday's villain.

Its impact is likely to fade month by month over the next year as the prices of key agricultural commodities stabilize, as do the costs of other production inputs such as fuel.

Why should the price of grains such as wheat, which doubled between June last year and February, start to ease or at least flatline for the next 12 months?

Basically worldwide production is expected to increase as the La Nina weather pattern ends.

La Nina, which occurs when sea-surface temperatures in the Pacific are below normal, brought flooding to key producers such as Australia and drier conditions to North America.

Forecasters are predicting normal conditions on both sides of the Pacific and around the Indian Ocean basin.

This is good as it means crops get the chance for a normal season or two before the possible start of an El Nino event, the opposite of La Nina.

The Indian Ocean Dipole, which measures sea-surface temperatures in that region, is also indicating more normal conditions. The Australian Bureau of Meteorology says it is "weakly positive," which should result in slightly drier conditions in Australia but wetter ones in countries such as Indonesia.

All this means that wheat output should increase by 3 percent to 670 million tons from July 2011 to June 2012, according to the Australian Bureau of Agricultural and Resource Economics and Sciences.

Wheat production will rise in the Black Sea region, Canada, Argentina and Australia, offsetting a drop in the U.S.

This will keep the price at an average of $310 a ton in 2011-12, down slightly from $318 a ton the prior 12-month period, the bureau forecast.

It's much the same story for coarse grains, with corn output expected to jump five percent to a record 855 million tons, driven by increased plantings in the U.S. and Latin America. Barley production should rise 6 percent, the bureau said.

Taking an overall picture, it is for world production of wheat and coarse grains to grow, taking production back above consumption, a reversal of the situation in the 12 months ending this month.

Turning to rice, the Asian staple, and Thailand, the world's biggest exporter, expects to ship a record 10 million tons in 2011, while India may resume exports after banning them in 2007 to secure supplies during a drought.

All this points to sufficient supplies of food in Asia. It will take some time to rebuild inventories of some crops, but even with stock replenishing it is reasonable to expect more stable prices.

This should help trim China's food inflation rate, which was 11.7 percent in the year to May. Food is the main driver of price rises, taking the consumer price index to 5.5 percent in May, a 34-month high.

That prompted another round of monetary tightening in China and fears of more in financial markets, thereby placing a question mark again over world growth prospects.

It is entirely possible that inflation in China and India may go higher for a few months yet, but the pre-conditions for lower food inflation are now in place.

Energy costs may also stay controlled for the rest of the year, with a Reuter’s poll of analysts published May 25, before the current pullback in prices, forecasting Brent crude to average $108.80 a barrel in 2011, below the current $112.05.

If food and energy costs stabilize, then inflation by year's end will look far healthier in China and India. It is economic growth in these two countries that will help the world avoid a double-dip recession.

It is also clear that the best way to control food prices is to ensure production growth matches or exceeds demand growth, and that healthy inventories are maintained.

Hopefully G20 agriculture ministers meeting today in Paris choose to look at ways of boosting the available farmland and its productivity and freeing trade as the best ways to lower food prices

 

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