Friday, February 18, 2011

Inflation and Rising Food Prices

There is a lot of chatter about inflation and how food prices are out of control and how speculators are driving up prices. I suspect speculators are adding to prices, but the chatter over food prices is premature and exaggerated. Here are some graphs from an economics research team at the Bank of Montreal:

That makes it clear that this isn't the "food crisis" of 2008. This is much smaller in scale. They also point out that:
Though market fundamentals differ by commodity, the increase in food prices overall is not likely to be as large as during 2007-08. First, while farm prices have generally risen, the increase is not as broad-based, partly because global stocks of key commodities are expected to be adequate. For instance, prices of wheat, corn, soybean and rice, adjusted for inflation, are still well below their 2008 peaks (Chart 3). Second, whereas a broad global inflationary climate helped to fuel agricultural price gains during 2007-08, the current substantial excess capacity in developed nations should contain prices. The fact that the price of crude oil—closely correlated with farm prices through the bioenergy link—is unlikely to return to 2008 levels also points to a more limited rally.
What should be obvious is that food prices are very volatile, and given the crop failures you would expect prices to jump. But assuming a return to more normal crop conditions, prices should ease back in line over the next couple of years:

So I plan to not get sucked into the gloom-and-doom crowd's excitement about yet another disaster that they see impending. The truth is, food prices are volatile and we just had some bad luck with weather. But there is no reason to extrapolate that into an end-of-civilization-as-we-know-it scenario.

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