David Zeiler: Rising food prices are hardly a secret. You’ve no doubt felt them in your wallet already. And just a few days ago, we again warned you about the storm that’s been brewing in the agricultural sector.
Well yesterday (Thursday) the Group of 20 (G20) decided to take action by announcing it would curb rising food prices by creating a more transparent system of tracking food supplies.
But sadly, that won’t be enough.
“The plan of action tries to address the symptoms of price volatility on agricultural markets,” Olivier De Schutter, the United Nations special rapporteur on the right to food, told the Guardian, “but it fails to address the causes.”
Those causes have been well-documented in Money Morning: The steeply rising global population, growing demand from emerging markets such as China, the spillover effect of rising energy prices, mandates on biofuels, and a weak dollar.
And those factors together mean rising food prices for the foreseeable future – regardless of what the G20 tries to do.
It’s a pain we will all share – and that will be felt most acutely in poorer countries – but companies involved in supplying and transporting food such as Archer Daniels Midland Co. (NYSE:ADM) and Bunge Limited (NYSE:BG) should do well.
Another company that should fare well is Deere & Co. (NYSE:DE), which last month raised its 2011 guidance based on rising sales of farm equipment.
Certainly, the G20 plan, officially known as the Agricultural Market Information System (AMIS), is well-meaning. The group believes volatility in agricultural commodities results from irresponsible speculation and a lack of information on global food stocks and the supply and demand of crops.
The G20 is betting that collecting that information from nations as well as private companies – and making it public – will help foil speculators and calm markets.
“What we saw when prices started to surge in 2008 was that the lack of information on stocks and availability can lead to panic in markets, and panic is what leads to price hikes,” World Bank President Robert Zoellick said at a news conference. “Uncertainty leads to volatility.”
Of course, a major flaw in the AMIS plan, aside from its failure to address why food prices are rising, is that it requires the full cooperation of nations and corporations.
French Agriculture Minister Bruno Le Maire even admitted that China and India have resisted disclosing details about their food supplies, citing national security. Both nations have already been given extra time to provide the requested information.
The private corporations present an even bigger challenge. Four companies – Cargill Inc., Bunge Limited, Archer Daniels Midland, and Louis Dreyfus Commodities – control more than 90% of global grain trading.
Although Le Maire has met with these companies in an effort to win their cooperation, the G20 can’t force them to disclose their data, and they may resist revealing sensitive information to competitors.
Beyond Their Control
This isn’t the first time the G20 has tried to exert some control over an erratic and troublesome commodity market.
Back in 2002 the G20 launched the Joint Oil Data Initiative (JODI), an attempt to arrest volatility in the oil markets. Participants in the oil markets have been slow to cooperate, and a glance at any recent oil price chart will tell you that the oil markets are as volatile as ever.
Similarly, the many pressures on agricultural commodities, most of which are beyond the G20′s control, will keep the market volatile while pushing prices upward.
In a report last month, the United Nations revised up its estimate for the global population in 2050 by 150 million people to 9.3 billion, and projected a peak of 10.1 billion by 2100. That will require a 70% increase in global food production, an issue the AMIS plan doesn’t even begin to address.
More immediately, you have the rapidly rising appetite of countries like China, which already is using 47 times more corn than it did 10 years ago.
And then there is the inscrutable emphasis of governments on biofuels that convert crops such as corn into fuel. The U.S. ethanol industry expects to convert 5 billion bushels of corn into ethanol next year, encouraged by the Renewable Fuel Standard mandate requiring the blending of ethanol with gasoline.
Recent spikes in energy prices also have affected food prices, with crude oil rising 10.3% in March, 36% higher than the same period in 2010.
“These oil price increases impact the price of food — a 10% increase in crude oil prices is associated with a 2.7% increase in the World Bank Food Price Index — through multiple channels,” a recent World Bank report stated. The organization’s Food Price Index has remained stuck near the all-time high it set in early 2008.
Finally, there’s the weak dollar. As the world’s reserve currency, commodities are usually priced in dollars, so a weak dollar tends to make commodities more expensive.
All told, it looks like the G20 has bitten off more than it can chew.
“Fixing the global food system and ending the food price crisis requires major surgery yet the G20 produced little more than a sticking plaster,” Jean-CyrilDagorn, policy advisor for Oxfam’s GROW campaign,said in a statement. “Agriculture Ministers agreed to address some of the impacts of high and volatile prices but failed to introduce the measures needed to prevent prices spiraling out of control in the first place.”
Related Tickers: PowerShares DB Agriculture Fund ETF (NYSE:DBA), Market Vectors Agribusiness ETF (NYSE:MOO), Potash Corp. (NYSE:POT), Monsanto (NYSE:MON).
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