Australian Australians could soon pay more for eggs, meat and other household staples because food producers are moving to pass on the biggest surge to global food prices in three years as a once-in-a-generation drought in the US decimates crops.
AAco chief executive David Farley
The drought in the US, the world’s biggest wheat exporter, has pushed wheat prices up 43 per cent since June to their highest in more than four years and corn prices have hit record levels, sparking fears a fresh food crisis could emerge and trigger riots in some poorer nations.
The United Nations Food and Agriculture Organisation warned food prices would continue to rise this year after its food price index spiked 6 per cent last month, its biggest rise in three years and snapping three consecutive months of falling prices.
The shock to global grain supply will focus trader attention on the weekend release of the US Department of Agriculture crop forecasts, which is expected to show further deterioration in the quality and size of some of the world’s most consumed grains and could force prices even higher.
Compounding problems in the US is drought in Russia, the world’s third largest wheat exporter.
The impact of poor weather in the northern hemisphere is reverberating across the Australian agricultural landscape, with the nation’s biggest beef producer Australian Agricultural Company forecasting cattle prices to rise up to 10 per cent to $4.25 per kilo within months because rising feed grain prices may force US ranches to trim the size of their herds.
“We are expecting a tightening of supply through the southern hemisphere spring,” Australian Agricultural chief executive David Farley said.
Egg producers warn prices for a dozen eggs could increase 50¢, chicken farmers expect prices to rise 5 per cent while analysts anticipate softening global milk prices to reverse as the impact of higher feed costs and lower herd numbers filters through the supply chain.
Rabobank general manager country banking Australia Peter Knoblanche said food producers exposed to higher grain prices would be under pressure to mitigate surging input costs. “There is a lot of pressure on producers to become more efficient and make a return,” he said. “How efficiently can producers pass on the costs to consumers? It is a tough global market. Consumers become more price sensitive in that environment.”
A price war between supermarket giants Coles and Woolworths provides a significant challenge for producers, and processors also facing rising costs for labour, electricity and transport.
Higher domestic food prices could put pressure on inflation, which was held down in the year to June by a slump in fruit and vegetable prices after above average production of some varieties.
The impact on inflation in emerging economies is more severe as food makes up a higher portion of the consumer price index. Economists are looking for China to cut rates or ease bank lending restrictions but Beijing’s capacity to do so may be restrained if rising food prices feed in to higher inflation.
The Reserve Ban
k of Australia said recent consumer price index data showed the quarterly inflation rate for the three months through June was higher than the “unusually weak March quarter outcome owing to a pick-up in fruit and vegetable prices, which tend to be volatile”.
Last month’s inflation data had shown a “subdued outcome for grocery food items – with a particularly sharp fall in bread prices in the quarter - [which] is consistent with strong competition among supermarket retailers putting downward pressure on prices in the supply chain,” the RBA said in its quarterly monetary policy statement.
The latest price spike is the third shock to grain prices in five years, highlighting the fragility of global food production as demand rises.
“If all the [crop producing] countries are having a stellar run, we can add a little bit to global stocks and build them up but any hiccups and we are just treading water,” Mr Knoblanche said.
The strength in soft commodity prices over the past five years has created a rush of money into agriculture as investors look to exploit what many experts believe are long-term attractive fundamentals.
The UNFAO has forecast agricultural output will need to rise by 60 per cent within 40 years to meet rising demand for food as the world’s population soars beyond 9 billion people. That equates to an extra 1 billion tonnes of grain and 200 million tonnes of meat.
Increasing affluence in developed nations is triggering greater demand for beef, poultry and pork and, as a result, putting further pressure on farmers to produce more wheat, corn and soy, which are used in animal feed.
The soft commodities price rally bodes well for Australia’s farmers, helping offset the impact of the rising currency and higher input costs. Many farmers have sold up to a third of their crops, more than double what they had a year ago, to lock in price gains but most are reluctant to sell until closer to harvest later this year. Provided good weather persists Australian farmers are expected to receive stronger prices later in the year as the fallout from the US drought persists.
Rabobank grains analyst Graydon Chong said prices were likely to remain high for the rest of the year but he did not expect wheat prices to race to their 2007 peak. “We have adequate global stocks of wheat and rice. The 2007 and 2008 season, we came off two droughts. We also had speculative funds move into commodity markets and we are not seeing the same sort of movements in the market at the moment,” he said.
The nation’s key commodity fo
recaster, the Australian Bureau of Agricultural and Resource Economics and Sciences, will update its expectations for prices and crop production on September 18.
with Brendon Lau
The Australian Financial Review
Source: Argentine Beef Packers S.A.
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