Thursday June 07, 2007

Why food costs more

canada.com :

After steamrolling through a laundry list of base metals, then oil and gas, the global commodity boom is finally hitting us in the gut: at the supermarket checkout counter. Global milk prices are rising at the fastest rate ever. Powdered milk, a key benchmark, has jumped 60% in six months to US$1.58 at the beginning of May. Since 2000, beef prices have jumped nearly 30% on the Chicago Mercantile Exchange. The experts have coined a new term to describe the phenomenon. They call it agflation, and they blame the hedge funds.

Hedge funds have been pouring money into commodity exchanges, driving up prices and transforming backwater grain bourses like the Kansas City Board of Trade and the Winnipeg Commodity Exchange into highstakes casinos. Since 2005, corn has nearly doubled. Wheat is up 50% in the same period, while canola, one of the biggest crops on the Canadian prairie, has climbed 34%. Many of the hedge funds are trend players, who make bets based on the technical details around the direction they think prices are heading, moving in and out of the market with lightning speed. For them, volatility is an opportunity to make money.

And the bad news for consumers is that although the hedge funds have helped drive food prices through the roof, the reality of stronger global demand could eventually push them even higher. China isn't going to go away, and its middle class - the segment of the population that accounts for most of the increased consumption - is swelling in size by about 40 million people annually.

And the emergence of the biofuels industry, the other main driver in the demand picture, is gaining steam as well. Meanwhile, on the supply side of the equation agricultural production has not kept pace. "For seven of the past eight years the world has not been able to produce enough food to meet demand, but you just can't keep on consuming more than you produce, " said Bill Gary, president of research firm Commodity Information Systems.

- Let's see, in short : 1. hedge funds, 2. growing demand, 3. biofuels, 4. supply shortfall. It's a heck of a knockout combination.

See also :

1. Milk prices expected to rise 9 percent
2. As corn price rises, so could food bills
3. Starving the people to feed the cars
4. Shell : Biofuels from food crops "morally inappropriate"
5. World grain stocks fall to 57 days of consumption
6. Food production to peak as fertile land runs out

(2007-06-07 12:23:24 SGT) [Biz] Permalink

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