The spectre of food inflation

When we use the fiat money system (paper money), inflation is inevitable. In another word, it is already bake-in the cake when we start to use the fiat money system. We cannot escape from it. Couple with a debt based economy, where most of the consumption is supported by debt (mainly credit card, loans), we got a fast moving economic train that moving too fast towards a solid hard wall.

 

The writing is on the wall: Food inflation will likely rear its ugly head again soon, and countries in Asia, including Malaysia, will also be feeling the heat.

According to analysts, global food prices are set to soar towards the end of this year and into next year because the prolonged drought in mid-western US has severely affected production of key agricultural commodities such as corn, wheat and soybean, and caused the prices of these grains to rise.

The United States is a major exporter of these key grains, upon which many countries around the world have become dependent. In the United States alone, the Government has predicted that food prices in the country would rise by about 3% to 4% in 2013 as a result of higher key agricultural commodity prices.

Meanwhile, the United States is not the only one affected by the hot dry spell. Other grain-exporting regions such as the Black Sea in Europe are also facing lower crop yields because they have also been affected by poor weather conditions.

Many economists are, therefore, raising the red flag on food inflation.

Analysts at global financial services provider, Barclays plc, for one, argue in their report that the risk of another wave of food inflation is rising fast, as grain prices over the week traded near their historical highs. They note that if such risk materialised into reality, it would be the third round of food inflation to affect the world since 2007.

Prices of corn, wheat and soy reached their highs on July 20, with the benchmark Chicago Board of Trade (CBOT) December corn closing at around US$7.95 a bushel, CBOT September wheat at around US$9.43 a bushel and CBOT November soybeans at around US$16.86 a bushel. Prices of these key grains have since eased but they are still significantly higher compared with previous months. On July 26, CBOT December corn closed at around US$7.76 a bushel, CBOT September wheat at around US$8.84 a bushel, and CBOT November soybeans at around US$15.67 a bushel.

According to investment bank Goldman Sachs’ forecast, corn prices could rise to a record of US$9 a bushel in the three months, while that for soybeans could hit US$20 a bushel, and wheat at US$9.80 a bushel. Natural causes aside, speculators who are commodity bulls could also be exacerbating the risk of global food price inflation, as these speculators position themselves to take advantage of the current market situation and further drive up commodity prices.

 

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