Monday, 10 Jan 2011 01:07 PM
Rising food prices are stoking global inflation with many
agricultural commodity markets driven higher by bad weather in
key producing countries, a senior trader at JPMorgan said.
"If you break down the inflation numbers then the impact of food
has been extremely significant," Will Shropshire, head of
investor trading, product development and agriculturals for
JPMorgan said in an interview.
"Increased prices for key agricultural food components (are)
undoubtedly going to have an impact on inflation," he added.
High food prices have moved to the top of policymakers' agendas
because of worries about the impact on inflation, protectionism
and unrest.
The United Nations' food agency, the Food and Agriculture
Organization (FAO), said last Wednesday that food prices hit a
record high last month, above 2008 levels when riots broke out
in countries as far afield as Egypt, Cameroon and Haiti.
Shropshire said the rise in agricultural commodities was largely
fueled by supply issues.
"Pretty much all of those were driven by the weather," he said,
citing drought in Russia last summer as among a series of
adverse weather patterns for grains production.
"I think we are now at a level that reflects the tightness of
the balance sheets (of the commodities). I think prices could
increase if we hit more supply concerns," Shropshire added.
Shropshire does not believe that investor buying of agricultural
commodities as an inflation hedge had been a key factor in price
rises.
"It is food that is driving inflation rather than inflationary
expectations driving people to invest in food," he said. "I
don't think you have got many investors buying corn at these
price levels because of broad concerns about global inflation."
Last year, U.S. wheat futures prices rose 47 percent, buoyed by
a series of weather events including the drought in Russia and
its Black Sea neighbors, corn rose more than 50 percent and
soybeans jumped 34 percent.
Alongside bad weather in Australia, Europe, North America and
Argentina, rising Asian demand is at the heart of the spike.
China, for example, is expected to buy 60 percent of globally
traded soybeans in 2011-2012, double its purchase of four years
ago.
LAND ASSETS
Catherine Flax, JPMorgan's CEO for Global Commodities EMEA, said
in a joint interview that investors and even countries were
looking at assets such as agricultural land.
"I do think investors are increasingly looking at physical
assets, whether agricultural assets or infrastructure type
assets, in part because of the expectations of inflation but
also I don't think investors are entirely over the insecurity of
the financial crisis," she said.
"I think that is a driver for people and countries buying
agricultural land."
Shropshire said he was keeping a close watch on weather in South
America. Concerns about dry weather in Argentina helped to drive
up soybean prices earlier this month to the highest levels since
September 2008.
"If we have any more shocks to supply the impact could get
increasingly dramatic. If we have any shortfall in South
America, for instance, then the impact because of the tightness
could be significant," he said. "The current balance sheets are
at quite critical levels and not dissimilar to where they were
in 2007/08," he added.
The rise has been broad-based with wheat, corn, soybeans, cotton
and sugar among those registering significant gains in recent
months.
Shropshire said that could slow the normal positive supply
response to rising prices.
"There are many shortages at the moment so the natural balancing
act will take a bit longer to pan out than it would if we just,
for instance, had a problem with cotton."
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