Food Price Inflation: Is it slated to clam down?
Essential food prices had sky rocketed between Nov 2007 and March 2008. During this period, Wheat, Rice, Sugar etc rallied the most in the past decade. We had many articles suddenly appearing in business dailies regarding shortage of essential food. Supply situation “WORST IN 3 DECADES”- Because of:
Stagnant productivity
Consistent rise in demand
More stress on bio fuels
Shift of agricultural land toward the production of Bio-Fuels, etc.
International money managers give these reasons whenever they meet us, presenting some structured product deal with commodity as underlying.
But these phenomenons were there for quite many years. Then why suddenly money managers found these reasons to shoot up the prices of these commodities too fast?
To my understanding, the sharp jump in commodity prices was less to do with the mentioned fundamental factors and more to do with liquidity shift from equities/ credit/ structured products to essential commodities. Gold, Oil, Wheat, Rice-all went up sharply in the past 6 months. Money flow in commodities was the highest by retail as well as the institutional investors during this period.
However, April was (rather surprisingly) very good month for credit and equity markets. There was a feeling that the worst is behind us! Money chased these markets on the back of improved sentiments and resultantly food prices fell sharply during Mid-March-April end.
Gold, Wheat, Rice, Sugar-All fell sharply during this period. However, Rice again shot up quite fast in the past 3-4 days due to Myanmar factor (its rice field was destroyed). Oil is at record high, because of strong fundamental reason.
Hence, if this relation is something to go by, we can see some easing on the food inflation front going ahead! However May again can bring the credit devil back to the market and these commodities can again rise (and consequently short term food prices led inflation), but hard to touch their recent highs.
See related charts below...
S&P (Jan 2007- May 2008)
Wheat (Jan 2007- May 2008)
Raw Rice (Last 12 Months)
Sugar (Jan 2007- May 2008)
Gold (Jan 2007- May 2008)
Stagnant productivity
Consistent rise in demand
More stress on bio fuels
Shift of agricultural land toward the production of Bio-Fuels, etc.
International money managers give these reasons whenever they meet us, presenting some structured product deal with commodity as underlying.
But these phenomenons were there for quite many years. Then why suddenly money managers found these reasons to shoot up the prices of these commodities too fast?
To my understanding, the sharp jump in commodity prices was less to do with the mentioned fundamental factors and more to do with liquidity shift from equities/ credit/ structured products to essential commodities. Gold, Oil, Wheat, Rice-all went up sharply in the past 6 months. Money flow in commodities was the highest by retail as well as the institutional investors during this period.
However, April was (rather surprisingly) very good month for credit and equity markets. There was a feeling that the worst is behind us! Money chased these markets on the back of improved sentiments and resultantly food prices fell sharply during Mid-March-April end.
Gold, Wheat, Rice, Sugar-All fell sharply during this period. However, Rice again shot up quite fast in the past 3-4 days due to Myanmar factor (its rice field was destroyed). Oil is at record high, because of strong fundamental reason.
Hence, if this relation is something to go by, we can see some easing on the food inflation front going ahead! However May again can bring the credit devil back to the market and these commodities can again rise (and consequently short term food prices led inflation), but hard to touch their recent highs.
See related charts below...
S&P (Jan 2007- May 2008)
Wheat (Jan 2007- May 2008)
Raw Rice (Last 12 Months)
Sugar (Jan 2007- May 2008)
Gold (Jan 2007- May 2008)
posted by Vikas Maheshwari, CFA at 6:47 PM
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