Rising oil prices are attracting the attention of inflation-worried investors. But lurking in the background is an even bigger risk for inflation vigilantes: rising food prices.
The benchmark FAO food price index has risen 2 per cent from December to February. Moreover, the cost of individual food commodities has continued to rise sharply in the first three weeks of March, suggesting that the FAO index would climb again this month.
The surge has wrongfooted many policymakers and traders who anticipated a drop as farmers sowed record number of hectares on the back of still high prices. Yet dry weather is denting the production prospects of western Europe, China and Latin America, boosting the cost of food commodities from wheat to palm oil.
The world has thin stocks of most crops as years of supply shocks reduced the inventories cushion, so the spell of bad weather is particularly worrying.
In China, the cost of corn hit an all-time high on Friday of Rmb2,497 per tonne, up roughly 10 per cent since the beginning of the year, after Beijing said that its inventories were lower than previously thought. Soyabean prices in Chicago are up 14 per cent so far this year to a six-month peak. And European wheat prices in Paris have surged more than 20 per cent over the past four months.
Meat prices are particularly high, with the cost of live cattle near an all-time high. Pork and poultry prices are up 8.5 and 7 per cent, respectively, from a year ago.
The increases are particularly important because central banks in emerging countries are moving from tightening to easing their monetary policy as inflation recedes and growth slows. If higher than expected food commodities prices force inflation back up again, countries such as China would need to reconsider their interest rates strategy. Food prices could again become a problem hard to stomach for investors.
By Javier Blas via Rising food prices hard to stomach – FT.com.