I am showing below two very important charts which should interest all of us.
Note that food prices have risen up 20 percent in 2010 and are still rising. Demand for food is inelastic, that is the economics term. In practical terms, demand for food will not fall when prices rice. For obvious reasons - we all have to eat. Globally we have production buffers in earlier years so that excess production plus previous years stock could cater for the rise in food consumption due to increasing incomes in poor countries.
See chart below
Food stocks seem to be comfortable as per forecasts but see the convergence between production and utilisation. 2009-10 saw a fall in production and it wreaked havoc on food prices. FAO forecasts record production levels for the year (hope it comes true) but the point to note is production has to keep pace or be faster than consumption. If production keeps pace, price levels will see mild increases and if it increases, prices may fall. However, prices will rise if there are shortfalls in production. The problem area is the possibility of speculative funds entering food in a big way searching for yields. With US interest rates zero bound for the next two years and the stock markets in comatose state plus the uncertainty in Eurozone that is a strong possibility. If that happens, the entire pricing mechanism will collapse because of increase in demand (due to speculative hoarding). Unfortunately this outcome is highly likely due to lack of profit avenues for idle capital hanging around. As a consequence, the poor will suffer. Governments of poor countries will be forced to subsidise food and that will cause imbalances in their budgets. Hope these things do not happen!
PS: There is a law of unintended consequences. With the developed world holding interest rates zero bound, I am anticipating a host of problem areas. This is one of them.
See chart below
Food stocks seem to be comfortable as per forecasts but see the convergence between production and utilisation. 2009-10 saw a fall in production and it wreaked havoc on food prices. FAO forecasts record production levels for the year (hope it comes true) but the point to note is production has to keep pace or be faster than consumption. If production keeps pace, price levels will see mild increases and if it increases, prices may fall. However, prices will rise if there are shortfalls in production. The problem area is the possibility of speculative funds entering food in a big way searching for yields. With US interest rates zero bound for the next two years and the stock markets in comatose state plus the uncertainty in Eurozone that is a strong possibility. If that happens, the entire pricing mechanism will collapse because of increase in demand (due to speculative hoarding). Unfortunately this outcome is highly likely due to lack of profit avenues for idle capital hanging around. As a consequence, the poor will suffer. Governments of poor countries will be forced to subsidise food and that will cause imbalances in their budgets. Hope these things do not happen!
PS: There is a law of unintended consequences. With the developed world holding interest rates zero bound, I am anticipating a host of problem areas. This is one of them.
No comments:
Post a Comment