Grain stock levels play pivotal role in food price spike

03-Mar-2009 - Last updated on 03-Mar-2009 at 11:12 GMT

Nailing down the key factors behind the recent price spike for staple grain commodities, a new report from the US department of agriculture underlines the pivotal role of stock levels in the price equation.

Input costs for bakers and snack makers have soared in the last two years, with a raft of recent factors feeding into price increases for basic food and non-food commodities such as wheat, corn, soybeans, and oil.

Zooming in on stocks, the USDA report demonstrates that since 1999 the world has witnessed a slower growth in production and a rapid growth in demand for grains and oilseeds.

The potent combination of these two factors drove a sharp downward trend in world aggregate stock-to-use ratio for these commodities.

"Today, stocks of grains and annual oilseeds are the lowest since 1970," writes the report.

Decades of stable food prices bred complacency

As the new century began, and after nearly two decades of low and stable food prices, the globe saw a slow-down in production growth and an increase in demand for staples.

Stable food prices over the preceding decades had "led to some complacency about global food concerns" and to a reduction in R&D funding levels, said USDA.

According to the report, government-held buffer stocks were deemed to be less important after an extended period of low food prices, and for the private sector, the cost of holding stocks, use of ‘just-in-time’ inventory management, and years of readily available global supplies provided incentives to reduce stock holding.

In the past ten years, the shift toward more liberalised trade has reduced trade barriers and facilitated trade, which in turn reduced the need for individual countries to hold stocks, explained USDA.

"As a result of these factors, global consumption of aggregate grains and oilseeds exceeded production in seven of the eight years since 2000," said USDA.

And since 1999, the global stocks-to-use ratio for the aggregate of grains and oilseeds declined from about 30 per cent to less than 15 per cent currently— the lowest level on record since 1970.

Countries with large foreign exchange reserves 'buy up' stocks

But the resulting low level of world stocks in 2007 incited importing countries to become anxious about being able to obtain their future food needs.

Consequently, importing countries with “very large accumulations of foreign exchange reserves”, such as China, Japan and oil-exporting countries (OPEC and Russia), were able to contract for their import needs regardless of how high the world price rose.

"They were able to import large volumes of food commodities in order to meet their consumption needs and allay their domestic food price inflation," added USDA.

As a result, "in essence, they can bid supplies away from other traditional importers that do not hold significant foreign exchange reserves."

Food commodity index matches crude oil rise

Painting a broader perspective on the current increase in food commodity prices, the report highlights that although the food commodity index has risen more than 60 per cent in the last two years, the index for all commodities has also risen 60 per cent and the index for crude oil has risen even more.

Since mid-1999, when all three indices were at about the same level, and approximately where they had been 10 years earlier, food commodity prices have risen a colossal 98 per cent (as of March 2008).

By contrast, the index for all commodities has risen by some 286 per cent; and the index for crude oil has risen an astronomical 547 per cent.

"In this perspective, the recent rise in food commodity prices might not seem so severe after all," added USDA.

However, the report points out that because an increase in the price of food—a basic necessity—causes hardships for many lower income consumers around the world, food-price inflation is socially and politically sensitive.

"That is why much of the world’s attention is now focused on the increase in food prices, more so than on the more rapid increase in prices of other commodities," continued the report.

Feeding the price rise, other factors

Further key factors cited by the report in the price rise phenomenon are: adverse weather, the rapid expansion of biofuels production, a rise in meat consumption that has sucked up global feed stocks, an increase in agricultural costs of production, protective policies adopted by some exporting and importing countries, the devaluation of the US dollar, and the possible contribution to price volatility food commodity markets due to the presence of speculators, such as hedge funds.