With High Production, Is Food Deflation Here to Stay?

At a Glance

  • Declining prices for food staples have helped consumers, and hurt retailers
  • Prices have been falling for three straight years in the U.K.

El Nino is wreaking havoc, the planet is breaking heat records and world population is on the rise. So where does that leave food prices?

Almost implausibly, food prices are weak globally and while there has been some recent firming most experts don’t see a quick turnaround after five years of deflation in the sector.

From the struggling farmer to the margin-squeezed shop seller, it might be enough for them to throw up their collective hands. But because of a number of factors, hope still does spring from the ground, if not eternally.

Food prices have sagged for a variety of reasons but ample stocks, bumper harvests and flagging Chinese demand are chief among them. Price weaknesses are being felt unevenly as well: prices are rising in Canada thanks to a weak currency while they are soft in the United States, Britain and in other parts of the EU.

In Britain, food deflation has been pronounced, largely due to economic uncertainties and a battle royale among retailers.

“Competition, and the relative weakness of growth in wages until recently has also worked to keep shop prices down,” said Zoe Maddison, Communications Assistant at the British Retail Consortium. “Whilst there is always demand for food when budgets are tighter, people trade down buying cheaper versions of products.”

 

Remember The Food Fights?

Declining prices have been a boon for the consumer but a shock for the industry. It’s a shock all the more because it was only last decade that the outlook couldn’t have been more different.

In the years leading up to the Great Recession of 2008, food prices were soaring globally, even sparking food riots in some developing countries. It was all part of a bull market that gripped commodity markets — from corn to crude — that was being paced in large part by China’s roaring economy.

Dairy prices in 2007, for instance, soared nearly 80 percent and grain jumped 42 percent that year, according to the U.N. Food and Agriculture Organization, or FAO.

“The recent rise in global food commodity prices is more than just a short-term blip,” the British think tank Chatham House warned in 2008. “Society will have to decide the value to be placed on food and how … market forces can be reconciled with domestic policy objectives.”

In recent years consumers have found relief rather than shock at the checkout counter. Global food prices did rise 2.1 percent in May, for the fourth monthly increase but food was still down a whopping 7.1 percent on the year.

It remains to be seen whether the increase of the past few months is a blip or something that will slowly build. The FAO is in fact forecasting another year of stable prices due to rosy production forecasts and healthy reserves.

In Britain, food prices were down 0.3 percent in the first five months of the year while overall retail prices were off 1.8 percent, according to the British Retail Consortium. Prices have been falling for three straight years.

James Walton, the chief economist at the research house IGD predicted in a look ahead for the year that the environment in Britain “will probably continue to be challenging and the UK also remains vulnerable to risk from international events, such as tension in Europe, bad debt in Asia and spreading conflict in the Middle East.”

The deflationary trend is proving a wrecking ball on the bottom lines of UK’s big food retailers. In May, Sainsbury’s announced a 14 percent drop in annual profits due to the cutthroat market.

Food costs are also looking soft in the United States, says Joseph Glauber, Senior Research Fellow at the International Food Policy Research Institute and the former chief economist at the U.S Department of Agriculture.

He said overall U.S. food inflation has been below 1 percent, which is down from a high of 3.4 percent in December 2014. But he added: “Food-at-home inflation has been even lower with year over year prices falling since last December.”

 

Middle Kingdom Woes

The World Bank in its most recent Food Price Watch credited the lower global food prices on “abundant” stocks, prospects of bumper harvests and lower oil prices, which helps to curtail farmer input costs.

“The decline in food prices is welcome, because more poor people can potentially afford to buy food for their families,” said Jose Cuesta, Senior Economist with the bank.

The cooling of China’s once red-economy has a lot to do with the broad retreat of commodity prices in general. Few analysts foresee China reasserting itself in the market in the near horizon, if ever.

Erik Norland, Executive Director and Senior Economist at the CME Group, argued in a recent report entitled Future of Food: Growing Global Appetites that China’s outsized impact on world markets may be over due to short term weakness and longer term population trends.

“China is beset by a number of short-to-intermediate term woes, including high levels of private sector debt and an overvalued currency that might also stall growth in food demand in the near term,” he wrote.

 

Weather, India to The Rescue?

To be sure, a few bad harvests — wilting in extreme heat or drowning in rains — in the various corners of the globe could send a chill through sagging markets. Norland of the CME believes El Nino will have an impact in soy products and in corn.

He said “excessive” rain in Argentina, Brazil and France are damaging harvests. “It’s still too early to see what impact it will have upon the growing season here in the U.S. but a hotter than normal summer could send corn prices higher.”

But over the longer term is there anything besides bad weather that could halt the deflationary spiral of global food prices? Possibly.

Norland of the CME sees two bright spots on the horizon for food producers — Africa and India. Both of those areas face significant challenges, however.

Africa is an interesting case because of what Norland called its “incredibly young population.”

“If Africa is going to grow its population over the next 25 years from the current 1.15 billion to a projected 1.91 billion and feed them well, it will need to either grow or purchase an enormous amount of additional food, or some combination of the two.”

He wrote that Africa must overcome three major developmental challenges:

1) Difficulty in generating an agricultural surplus.

2) Difficulty in generating a capital surplus.

3) Political fragmentation.

India’s population, meanwhile, is expected to rise 30 percent between now and 2040 and it could struggle to feed itself because most of the country’s arable land is already in heavy use.

“As such, we would not be surprised with India buying increasingly large amounts of food from the world market – potentially great news for farmers in Europe and the Americas.”

“What is also promising about India is its relatively low calorie count per person. This means that not only will population growth likely boost food consumption, but there is also great potential for increased per capita consumption.”

 

Optimism Revisted

So it can be seen that the outlook is not all bleak for the food sector. The end of food deflation may be not nigh, but it probably won’t last forever. For example, recent USDA crop reports for wheat and corn resulted in some short-term positive market reaction in the U.S., though sustaining these levels is highly dependent on a range of unforeseen factors, including demand and the weather.

As the American columnist and humorist Will Rogers once said: “The farmer has to be an optimist or he wouldn’t still be a farmer.” That sentiment pretty much sums it up for the entire agricultural sector.

Russell Blinch has extensive experience writing about commodities, energy and the environment. His work has appeared in numerous outlets such as the Guardian, DeSmogBlog, Huffington Post, Reuters and at his own site, copycarbon.com. Russell was previously a senior editor with Thomson Reuters where he wore many hats—correspondent, bureau chief, and specialist editor – while being stationed in Ottawa, San Francisco, Singapore, Washington, DC, and Toronto.

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