Home > Agflation to hit animal protein and dairy industries: Rabobank

Agflation to hit animal protein and dairy industries: Rabobank

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Skyrocketing agricultural commodity prices are causing the world to re-enter a period of ‘agflation’, with food prices forecast to reach record highs in 2013 and to continue to rise well into Q3 2013.

However, unlike the staple grain shortage 2008, this year’s scarcity will affect feed intensive crops with serious repercussions for the animal protein and dairy industries, according to agribusiness banking specialist, Rabobank .

Luke Chandler, Global Head of Agri Commodity Markets Research at Rabobank comments that the impact on the poorest consumers should be reduced this time around, as purchasers will switch consumption from animal protein back towards staple grains such as rice and wheat, which are currently 30% cheaper than their 2008 peaks.

Nonetheless, price rises are likely to stall the long-term trend towards higher protein diets in Asia, the Middle East and North Africa. In developed economies such as the US and Europe, where meat and corn price elasticity is low, the knock-on effect of high grain prices will be felt for some time to come.

Due to the long production cycles of the animal protein and dairy industries, the effects of grains shortages will be more sustained as herds take longer to rebuild, maintaining upward pressure on food prices. Since food makes up a smaller proportion of budget spend in such countries, the current period of agflation should not lead to the unrest that followed the 2008 shortage.

Rabobank estimates that the FAO Food Price Index will rise by 15% by the end of June 2013. In order for demand rationing to take place, in turn encouraging a supply response, prices will need to stay high. As such Rabobank expects prices, particularly for grains and oilseeds to remain at elevated levels for at least the next 12 months.

Whilst the impact of higher food prices should be reduced by favourable macroeconomic fundamentals such as low growth, lower oil prices, weak consumer confidence and a depreciated US dollar, Government intervention through stockpiling and export bans could aggravate the situation, which will likely encourage further increases in world commodity and food prices.

Rabobank expects that localised efforts to increase stockpiles will prove counterproductive at the global level, with those countries least able to pay higher prices likely to see greater moves in domestic food price inflation.

On top of that, Rabobank warns that global food stocks have not been replenished since 2008, leaving the market without any buffer to adverse growing conditions. Efforts by governments to rebuild stocks are likely to add to food prices and take supplies off the market at a time when they are most needed.

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