Global Food Prices, What Goes Up Must Come Down…..But When?

Wheat and Rice Supplies Exceed 2008 Levels; Cotton and Corn are in Tight Supply

Overall stocks-to-use ratios remain tightest for cotton and corn. The stocks-to-use ratio is defined as the quantity of a commodity left over at the end of the marketing year divided by the level of domestic consumption over the full marketing year. The corn stocks-to-use ratio is tightest at an estimated 15.2% for the world, 10.0% if China is excluded. This estimate factors in a 23.5 million metric ton crop in Argentina, which may be smaller due to the drought. Rice stocks-to-use ratios, excluding China, are higher than 2007–08 levels and higher than the average levels over the previous 30 years. Wheat stocks are significantly higher than 2007–08 levels and very close to average stock levels over the previous 10 years.

While rice and wheat stock levels are at average or above-average levels, corn, cotton, and sugar stocks remain tight. The recent experience with 2008 price levels and trade restrictions has the commodity market on edge. Despite adequate supplies for rice and wheat, these prices have moved upwards with corn, cotton, soybean oil, and sugar. Some of this can be attributed to trade restrictions, such as the export bans imposed by Russia and export quotas imposed by Ukraine, which led to speculation on supply availability. In addition, developing countries appear to be directly and indirectly changing their stock-holding behaviors. For example, Thailand has been holding rice stocks under the guise of supporting farm prices. Other countries, such as China, appear to be rebuilding stock levels of certain commodities.

The data on global stock levels for the key agricultural commodities are often revised and should be viewed with caution. Further, the data on Chinese stock levels are more of an educated estimate by the U.S. Department of Agriculture (USDA). For this reason, we often discuss both world and world (excluding China) stock levels. In addition, China removed some of its subsidies for stock holding, which resulted in significant declines in its stock levels during 2000–05. Note that global ending stocks are measured at the end of the marketing year: August or September for corn, soybeans, rice, and cotton; June or July for wheat.

Food Price Implications

In the United States, the USDA estimates that about 19 cents of every dollar spent on food actually goes back to the farmer via commodity prices. It is also interesting to note that the consumer price index for food never retreated after the run-up in food prices in 2008. This suggests that processors did not lower prices despite lower commodity costs.

Globally, developing countries are more sensitive to rising agricultural commodity prices. Many developing countries rely on imports to meet their food needs, especially in large urban areas, making them particularly sensitive to global prices. Consumers in developing countries often spend in excess of 40% of their income on food. Thus, these 20–50% commodity price increases make it difficult or impossible to support their families. The sensitivity to specific commodities also varies by region. In Africa, corn, millet, and sorghum account for 27% of daily caloric intake. Consequently, Africa is much more sensitive to corn prices—and related grains like millet and sorghum—than rice prices (8% of daily calorie consumption). On the other hand, Asia is more sensitive to rice prices, which accounts for more than 30% of daily calorie consumption. Europe, the Commonwealth of Independent States, North America, and the Middle East are much more sensitive to wheat prices.

IHS Global Insight Commodity Price Outlook

Strong corn prices are likely to persist over the next few years, given the weak corn crop expected in Argentina. While there are some weather concerns for the winter wheat crop in the United States, China, and Russia, other areas such as Europe and Canada may recover from last year's weather issues. Prices are expected to decline moving into the second quarter as the Northern Hemisphere will begin to harvest and export restrictions are eased, barring average production. Rice prices in the United States are firming in the near term to bid in potential acres to compete against soybeans and cotton, but continued release of Thai stocks will keep the price movement minimal on a world scale. Sugar prices are expected to come off their highs from earlier this year when the harvest begins in Brazil this summer. Prices will stay relatively high compared with historic levels, as additional supplies from major exporting countries will not be available until the end of this year. Cotton prices will slowly fall from their all-time historic highs as major producing countries respond to these prices with additional production that will be harvested beginning after August 2011. Prices for soybeans will continue to be strong for the next year due to production shortfalls in 2010–11 as well as continued demand. Prices will need to stay elevated in order to compete with corn area for this coming planting time frame, but it will soften as the Northern Hemisphere begins to plant. These forecasted prices are based on average regional weather and continued exports by major exporting countries. In the event of detrimental weather, exports may be further banned, supplies will tighten, and prices will rise.

by John Kruse and Brandon Kliethermes