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Friday, January 13, 2012

Are We Still Seeing A Food Price Spike Or Something Else?

When I started posting about the most recent spike in global food prices (January 2011), I never expected to still be talking about high prices 12 months later (see graph above).  A "spike" is supposed to go up and then down.  The current "spike" isn't doing that very well.  Yesterday, the UN Food and Agriculture Organization posted their monthly update  (FAO Food Price Index).   This index reflects the prices that buyers experience in international trade.  Consumers in import-dependent countries experience these sorts of prices, while consumers in "bread basket" countries like the US see much more modest price swings.  Those who are most effected by this phenomenon are not getting much of a break.

What Is Different About This Price "Spike"?

The food price spike of 2007-9 (peak 2008) was unprecedented at the time as prices had been rising moderately with minor swings for decades.  That spike came to an abrupt end by 2009, but then returned in mid 2010.  This new spike is different from the first in many ways, but by looking at three-year windows (see graph below), the difference becomes more apparent.

The "baseline" index has been climbing slowly, and until this last three year cycle, the gain was on the order of 20 index points.  Unless there is a dramatic change in trend, the "down side" of the most recent spike appears to represent something more like a 40-60 index point gain.

The Cereal Index Is A Little More Encouraging

Spurred by high commodity prices, farmers around the world have been increasing plantings of some crops and intensifying their production of others.  When not frustrated by extreme weather events, they have been able to increase overall supplies.  In the graph below we see that although the cereal price index has not declined as rapidly as it did in 2008/9, it may return to a level not too far above the previous low.  The other indices for milk, sugar, oils, dairy and particularly for meat still show very limited retreats (all these graphs on SCRIBD)

What Is Next?

If the previous pattern holds, we might expect to see the beginnings of another spike around June of this year.  There are some reasons to think that may not occur.  The continued struggles in the EU economy may dampen prices as that region is a major importer of many commodities.  The end of subsidies and tariffs for corn-based ethanol in the US might reduce overall grain demand.  The gridlock of US governance will probably only intensify as the election approaches, and that could keep the economic recovery anemic.  That would in turn have a negative effect on commodity prices.

The Climate Change Wild-Card

On the other hand, we can't predict what weather will do to global food production this year.  This brings me back to the topic of my original post in this series.  At that time I expressed concern about the evidence of a second major spike in food prices.  I was also encouraged by the news that long-awaited drought tolerance traits were finally becoming commercially available, particularly for corn.   Two companies introduced drought tolerant corn hybrids in 2011 which were developed through conventional breeding methods speeded up with biotechnology testing capabilities (Marker Assisted Selection).  These included Pioneer Hi-Bred (part of DuPont), and Syngenta. Monsanto and BASF cooperated to develop a GMO drought tolerant corn.  It will be in large scale field tests in the 2012 season.  It will probably take several years before farmers can sort out when and where these traits will make the most difference. Fortunately, there is also a major project underway to develop drought tolerant corn (maize) for Africa.

We are really in uncharted territory when it comes to the future of the global food supply.  Fortunately, there continues to be a major private/public effort to make the advances - small and large - that will increase our chances of keeping up with the challenge.

Graphs by Steve Savage based on the FAO data. Additional graphs available for the other elements of the food index. Please feel free to comment here or to email me at