Pressure On Food Prices Food Outlook 2012

Two important and interesting events which happened this year are very relevant to the way the outlook for food will be shaped in the coming year.

 

2011 - A mixed year.
On 3rd November, the Food and Agriculture Organization released the food price index for October. It continued to follow the downward trend to reach its lowest for the year.  The runaway inflation in food prices through all of 2010 and into early this year seems to be arrested. While this did provide some relief from the price peak achieved in February this year, the October price index continued to be 5% higher than the corresponding period last year.
 
On 31st October, the United Nations estimated that the global population has reached 7 billion. The world has added 1 billion people every 12 years from 5 to 7 billion and the population is expected to reach 8 billion in 2023. As each country identified its symbolic 7 billionth baby, this event has specific significance to the food requirement for the developing world, especially in Asia. In 2011, 60% of the global population lived in Asia. As a region with growing population, its impact on food inflation and security will continue to be an important factor.
 
While both these events point to contradictory directions, the slow easing of food prices in 2011 can be attributed to several factors:
• The global economy continued on a weak trajectory. The demand growth for food slowed in 2011 compared to the preceding year. The subdued macroeconomic outlook is likely to extend into 2012.
• Overall food production and supply in 2011 improved than the preceding year, supported by record production of wheat and rice. Global wheat production is likely to increase by 6% over last year
• With the combination of increased supply and subdued demand growth, the food supply and stock situation continued to show improvement over 2010.
• The impact of weather was more moderate than the extreme weather conditions seen in 2010, in spite of the severe flood situation in Southeast Asia.
 
Looking beyond:
food prices
While all these factors helped arrest the price increase, the global food demand and supply is still delicately poised for 2012. The drivers of food prices are becoming increasingly complex, which include long term fundamental factors as well as short term influencers. While the long term factors create the baseline for food prices, short term influencers determine the volatility. In the Asian context they can be seen as follows:
 
Long term drivers
• Increasing demand due to growing populations, especially in the developing economies of the region. Population growth in South Asia was 1.46% in 2010 compared to the average of 1% for the Asia Pacific region.
• Production and supply. This ultimately decides the stock situation at the end of the year, which has shown a positive trend in 2011. All the key producing countries in Asia – China, India, Indonesia, Vietnam and Bangladesh show higher to record outputs for rice in the current year.
• Growing incomes. The middle class in Asia is the fastest growing population groups in the world. Compared to just 21% of its total population in 1990, Asia’s middle class constituted 56% of the population by 2008 (ADB working paper, 2010).
• Changing dietary preferences.Globalization and increased spending power in Asia is driving need for high protein and nutritious food. This trend will continue to impact food prices in the coming year.
 

 

Short term influencers.
The volatility in food prices in the last few years has been driven by a number of factors. Some of these were:
• The impact of weather. This played a critical role in 2010 with intense floods and droughts in the region. In 2011, the largest impact was due to the flood situation in Thailand.
• Trade barriers in response to rise in food prices. These were seen to ease in 2011 as countries like India lifted the ban on rice exports.
• A significant role was played by large investors who entered the derivatives markets based on food commodities. This speculation was not based on any agricultural market fundamentals, leading to price volatility.
The combination of the long term drivers and the impact of the short term influencers will determine the food prices for 2012.
 
2012: A stable year
for food prices
The easing of food prices in recent months should not be cause for complacency. Although the impact of the September floods is not likely to have a significant impact on global production levels, it will create issues at the local level. The floods spread across large areas in Thailand, Cambodia, Vietnam and Lao PDR pushing up domestic prices.
 
The global economy is expected to stay weak in 2012, with many countries clipping their growth forecasts. Even China’s growth forecast is likely to fall below 2011. This scenario is unlikely to place higher demand on food, providing it stability in the coming year. The only major factor which can upset this outlook would be a severe weather situation.

By Satish Lele

Vice President,

Chemical, Materials &

Food, Asia Pacific,

Frost & Sullivan

 

(FOODREVIEW INDONESIA Edisi Januari 2012)

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