Global Investing

Food prices may feed monetary angst

Be it too much sun in the American Midwest, or too much water in the Russian Caucasus, food supply lines are being threatened, and food prices are surging again just as the world economy slips into the doldrums.

This week, Chicago corn prices rose for a second straight day, bringing its rise over the month to 45%, and floods on Russia’s Black Sea coast disrupted their grain exports.  Having trended lower for about nine-months to June, the surge in July means corn prices are now up about 14% year-on-year. And all of this after too little rain over the spring and winterkill meant Russia, Ukraine and Kazakhstan’s combined wheat crop would fall 22 percent to 78.9 million tonnes this year from 2011.

But as damaging as these disasters have been for local populations, their effects could be much more widely felt.

The problem is that not only do rising food prices raise the cost of living, squeezing incomes further during a downturn, but by raising inflation they severely restrict the government’s flexibility in setting monetary policy. Just as Mike argued previously on this blog that the falling oil price amounted to a green light for the cutting of interest rates, rising food prices will force many central banks to think again about the pace of monetary easing.  And the problem is most acute in developing countries where the proportion of food in consumer price baskets is far higher than in the richer western economies. For example, according to the US Department of Agriculture, an additional $1 added to income sees 56 cents more spent on food, beverages and tobacco in Burundi, compared to 5 cents more in the United States.

The Russian central bank is a timely case in point when it comes to restrictions on monetary policy. On Friday they announced that they were keeping interest rates the same; as much as growth is struggling and could do with some monetary stimulus, high inflation, fuelled by food prices, is tying the bank’s hands.

from MacroScope:

Argentina set for wheat windfall

Not everyone is upset about the 50 percent surge in wheat prices over the past month.

Wheat's rise to 2-year highs was caused first by heavy rains in Canada and now by a Russian export ban that was triggered by its worst drought in decades. There are floods in Pakistan, another major wheat grower. But while the wheat market shenanigans are triggering much hand-wringing across developing nations, Argentina, one of the world's top seven wheat exporters, may be set for a windfall.

Farmers there are increasing wheat plantings, the Buenos Aires Grains Exchange says. The South American country is expected to export around 8 million tonnes of wheat in the 2010-2011 year. With wheat futures on the Chicago Board of Trade at around $8 a bushel, a very simple calculation shows export revenues are going to very significant.