Business | Markets
Food price crisis adds to emerging market troubles
Wheat costs will rise despite 50% increase
- Reuters
- Published: 00:00 August 8, 2010
London: A food price crisis may be the next stumbling block for emerging economies, even as their bonds and stock markets rally in relief at an easing of the Eurozone's debt-crisis.
Wheat prices have jumped by more than 50 per cent since June and are likely to rise further due to expectations of tighter supplies, triggering concerns about a repeat of the food crisis in 2007-08 that forced interest rates higher in many economies and led to emergency controls in others.
The UN's Food and Agriculture Organisation (FAO) cut its 2010 global wheat forecast by about four per cent last week and said world wheat supplies may shrink next year if severe drought continues in Russia, Europe's leading wheat producer.
Russia imposed a temporary export ban on Thursday in response to a record-breaking heat wave and the extent of the damage to crops and its economy is only beginning to become clear. Spiralling wheat prices could translate into higher inflation and possibly higher interest rates in emerging market economies.
The FAO said healthy world stock levels should prevent a repeat of the crisis of 2007-08 but past squeezes on food have led some central banks to hike aggressively in a bid to head off a second round of price rises in their economies.
A big deal
Analysts and investors are already preparing for a tighter monetary policy in emerging economies, even as they look to the possibility of further quantitative easing in the United States.
"It is a big deal for emerging markets, though [it] maybe not [be] as big a deal as it was in 2006/7/8, as food prices make up 20-50 per cent of emerging CPI baskets," said Charles Robertson, EEMEA chief economist at ING. "Food prices never move in the US as a result of changes in global harvests, because so much of the price of food is taken up by packaging, suppliers.
In the EU, food prices move a little bit but in emerging markets, food price rises can add a few percentage points to the inflation rate."
Countries likely to be particularly at risk from high wheat prices include Nigeria, which has 25 per cent of its CPI basket in bread and cereals, Robertson said.
Inflation
Western economies typically have less than 20 per cent of their CPI basket in food, compared with 30 per cent on average in emerging markets, according to US bank Morgan Stanley.
In Russia, higher wheat prices are contributing to speculation that the central bank will raise interest rates as early this year, after cutting 14 times since April 2009 to a record low refinancing rate of 7.75 per cent.
Annual inflation in Russia is 5.5 per cent. "We see more upside risks... even a 15 per cent inflation rate next summer does not seem unthinkable," said analysts at Danske in a client note. Some central banks have already responded.
In India, a year-long spell of double-digit inflation, largely on rising food prices, sparked massive street protests.
One of a small but growing number of economies to have started raising interest rates, India has lifted its main lending rate four times by a total of 100 basis points since March, to 5.75 per cent. Analysts say there is more to come.
However, an end to the El Nino weather pattern which led to the food price spike in India may actually reduce food price inflation in India, analysts say.
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