Global Food Demand Puts Up Prices

16.11.10

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Global food supplies are still worrying low and pushing up the price of not only corn and cotton, but as a knock on effect of meat and textiles too. Economists had predicted that price rises woul

Global food supplies are still worrying low and pushing up the price of not only corn and cotton, but as a knock on effect of meat and textiles too. Economists had predicted that price rises would be temporary following drought and floods in wheat and cotton producing countries but considering other factors the outlook might be more long term. Higher food prices will put pressure on inflation and readers may be well advised to review their financial planning to protect their wealth from inflation.

Food prices worldwide have reached a two year peak. Wheat prices have risen 60% in the past year, pushed up by export restrictions in Russia and Ukraine after a summer drought devastated crops. Corn and barley prices are up, which affects the price of animal feed resulting in a 20 year high in the price of meat. Cotton hit a 15 year high in September and retailers are predicting more expensive cotton based clothes in the shops next year. The prices of other soft commodities like coffee, tea and cocoa are also edging higher.

Worldwide stocks of corn are at their lowest for 37 years. In the US, corn yield is down after a hot summer. The US is the world?s largest corn grower and exports the majority of global trade in the grain. The Department of Agriculture has predicted that corn stocks will halve to their lowest levels in 14 years. Initially this was blamed on the depleted US stocks but China imported a record amount of corn in August and large importers from the Middle East and North Africa have begun to hoard supplies.

A corn shortage pushes up meat prices. FreshLook data said that the price of beef in the US rose by almost 6% in the three months to 22nd August, while pork jumped more than 8% and chicken by almost 2%.

China needs the corn for animal feed as more and more Chinese switch to eating meat. t takes 7kg of grain to produce 1kg of meat. In a generation, the Chinese have more than doubled their meat consumption.

It is not just in China where the demand for meat is soaring. Prospering middle classes in other Asian countries like India, Indonesia and Vietnam as well as Brazil, Mexico and Russia have a growing taste for meat, mainly pork. In Brazil, the world?s second largest beef producer, there is a record demand for the product which is limiting exports.

Economists say that the price of animal feed would discourage expansion in the cattle and pig industry. Reduced meat stocks in major producing countries like Argentina, the US and Australia, would also add to price pressures.

Another threat to the beef industry is that for the first time sales of mince have surpassed those of steak and roasting joints. Supermarkets are displaying more mince on their shelves as a carrot to encourage customers in. “If more mince goes on the shelves then more beef cattle will be massively devalued and more farmers will give up producing it,” said the chairman of the UK?s National Beef Association (NBA), Oisin Murnion. Statistics from NBA reveal that supermarkets are selling mince at an average of ?3.70 a kilo, as opposed to more lucrative cuts which are priced at up to ?19 per kilo.

The World Bank says that food production must be lifted 70% by 2050 to cater for population growth, greater prosperity, particularly in developing countries, and the consequent move in food tastes to meat. As an illustration, a 1% annual rise in population growth equates to the population of Britain extra to feed each year.

A report by the World Bank entitled ?Rising Global Interest in Farmland: Can It Yield Sustainable and Equitable Benefits?? states that in 2009 45m hectares worth of large scale farmland deals (approximately almost double the size of the UK) were announced indicating a ten-fold increase in a decade.

Two-thirds of the land sold has been in Africa. Brazil, Argentina and Madagascar are restricting sales to outsiders. Countries in Asia and the Middle East, such as China, South Korea and Saudi Arabia have bought land to provide for their home markets.

Critics are concerned that a large portion of the land is being banked for further use and not actively farmed. They are also concerned that land grab is threatening the rights and livelihood of local land owners.

The World Bank has formulated seven principles for responsible agro-investment which are: 1) respecting land and resource rights, 2) ensuring food security, 3) ensuring transparency, good governance and a proper enabling environment, 4) consultation and participation, 5) responsible agro-investing, 6) social sustainability and 7) environmental sustainability.

Director of agriculture at the World Bank, Juergen Voegele, said in the report that ?given commodity price volatility, growing human and environmental pressures, and worries about food security?, interest in farmland is rising.?

The report also questions the Western world?s desire for biofuels which is adding to the land grab activity in the developing world.

The food shortages and consequent rise in prices is a growing concern worldwide. The tentacles are long and reach into the price and availability of clothes as well as other cotton-based end fabrics, biofuels and fertilisers.

Inflation is a concern in that it will erode your wealth in the long-term, affecting your future financial security and potentially the comfort of your lifestyle in retirement. It will also leave you less to pass onto your children and grandchildren. While personal rates of inflation vary, the price of food affects us all. But you don?t have to worry because one way to counteract this is to include a section of real assets in your portfolio which will cover commodities like agriculture, livestock and energy, for which increasing demand will command rising prices.

Speak to an experienced international wealth manager like Blevins Franks for advice on investment opportunities most suited to your specific circumstances, aims and objectives.

By Bill Blevins, Managing Director, Blevins Franks

21st October 2010

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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