I frequently read articles posted on Drovers Cattle Network, simply because they have their virtual finger on the pulse of what is going with regards to the drought and potential for food shortages (and price increases). I read an article this week that I would like to share, what you need to understand is that food prices are already rising and will continue to do so. As preppers it is important that we maintain some reserves to dip into in case prices get out of control. Do not rely on hope as a course of action, i.e. “I sure hope they get this all figured out.” The time to prepare is now, plan accordingly,
Commentary: Higher prices, more pain
by Dan Murphy
World food prices will exceed the all-time high set last year as drought in the United States, Latin America and Russia drive up the cost of animal feed, which is spurring livestock producers and dairy operators to cull their herds.
That’s sobering news. Food prices, as tracked by the United Nations, could rise by as much as 15% a year from now, according to a Bloomberg News analysis of a report from Rabobank International. If accurate, such an increase would set a new record.
Given the extreme weather conditions, grain and oilseed prices should “remain at elevated levels” for at least the next 12 months to ration demand and encourage crop farmers to boost planting, said Nick Higgins, a Rabobank analyst.
Thanks to the worst U.S. drought in half a century, followed by dry weather in South America (it’s the spring planting season there), corn prices have soared to a record $8.49 a bushel in August on the Chicago Board of Trade. This month, soybeans rose to an all-time high of $17.89 a bushel.
Of course, livestock prices have trailed behind rising feed costs because the accelerated pace of culling animals has created a temporary glut in the marketplace. That will change next year, as supplies ultimately are reduced.
And here’s the understatement of the year:
“The impact of higher grain and oilseed prices will be significant for the animal protein and dairy sectors, as they are likely to be squeezed by higher feed costs,” Higgins said. “The full effect of this commodity price rally and the subsequent lower meat and milk output will be a multi-year rebuilding of herds, which will sustain high price levels.”
The price cycle
For producers, this is a familiar, if painful pattern. Spot-market hog prices could rise 31% by the end of June 2013, Rabobank analysts predicted, while cattle prices could increase by a more modest 6%. That’s partly a function of supply and demand. However, input costs are also a factor: Grain price increases could slow to only 3% next June, while soybeans could drop almost 16% as production rebounds in Brazil and elsewhere, according to the bank’s analysis.
Higher food costs may be “less severe” on consumers than the food crisis in 2008 because global shortages have affected corn and soybean supplies more than “core food staples,” including wheat and rice, Rabobank said. The State Department estimates that surging food costs triggered more than 60 riots worldwide from 2007 to 2009. Food prices also contributed to unrest that toppled governments in Egypt and Tunisia last year.
Food costs climbed to a record in February 2011, when the UN’s Food & Agriculture Organization food-price index peaked at 237.9 points, thanks to higher prices for dairy products and commodities such as corn and soybeans. In July, the index rose 6.2%, the biggest gain in three years.
Here’s what is more problematic for animal agriculture: The growth of exports may be stalled for some time to come.
“Higher [meat] prices will stall the long-term trend towards higher animal protein diets in developing economies,” Higgins wrote. “Rabobank expects the developing world, with its high demand elasticity, especially to meat, to ration import demand of grains, oilseeds and meat most heavily, leading consumption growth to slow and even recede for a period as prices rise.”
Countries in East Asia and the Middle East might introduce “interventionist measures,” Rabobank said, including stockpiling commodities of placing moratoriums on exports as supplies tighten.
The bank’s analysts predict that corn futures will average about $8 a bushel during the fourth quarter, before rising to $8.10 in the first quarter of 2013 and $8.20 in the second quarter, Rabobank estimated. Soybeans will average $16.85 in the fourth quarter, $16 in the first quarter and $14.50 in the second quarter. Wheat will be $8.80 in the fourth quarter, $9 in the first quarter and $9.20 in the second quarter, according to the report.
The best that can be said that about the bleak outlook is that it could be worse.
But that is small consolation for millions of producers dependent on affordable input prices to maintain what are often very thin margins on the livestock they bring to market.
Higher prices won’t stop the majority of consumers from turning away from animal foods, since the alternatives are going to become just as costly, but it certainly won’t strengthen long-term demand.
That’s a reality the industry ought to prepare for and react to now, not next year.
The opinions expressed in this commentary are solely those of Dan Murphy, a veteran food-industry journalist and commentator.