Higher prices expected for commodities
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The U.S. Department of Agriculture last week forecast food prices will only rise 0.5 percent to 1.5 percent this year, less than the 1.8 percent increases in 2008 and 2009 and the lowest rate of food inflation since 1992.
Enjoy it while you can, commodities followers say.
They predict a variety of short-term factors -- ranging from the current drought affecting Russia's massive wheat crop and floods in Pakistan -- as well as growing global aspirations for the high-calorie diet American consumers take for granted will translate into higher prices for meat, wheat, corn and other food items in the years ahead.
Their forecast is based on a simple economic assumption: Demand will outstrip supply.
While food prices have backed off from earlier highs, they remain well above historic levels, Jefferies & Co. analyst Stephen Volkman said. Prices are elevated even though farms around the world are operating at near capacity "even at the bottom of the global recession," he said. The USDA is forecasting U.S. farmers will produce 2 percent more corn and soybeans this year than they did in 2009, when they set production records for both crops.
"We expect a sharp recovery in agricultural commodity prices as the global economy recovers," Mr. Volkman wrote clients last week. "With limited global capacity available, any demand increase appears likely to shift crop prices markedly higher."
It's not unusual for weather to have a sudden impact on food prices, whether it's too little rain in the U.S. grain belt or an unexpected freeze that stunts Brazil's citrus crop. And concerns about Mad Cow disease and other problems can send meat and poultry prices higher.
Daniel Basse, president of AgResource, a Chicago commodities research firm, said the price impact of the drought in Russia and Eastern Europe and the Pakastani floods will carry over into next year. If there are more weather-related problems, the percentage of disposable income U.S. consumers spend on food could go from 10 percent to 12 or 13 percent in the next few years, he said.
"We're only beginning to understand this is a global food market and whenever you have problems like a drought in Russia, it does affect our dinner plate," Mr. Basse said.
The impact of weather-related events, while painful, is short term.
First Published August 29, 2010 12:00 am
