Rising Food Prices: A Complex Equation

March 31, 2011 Food price increases around the world have drawn much attention not only among agro-food market professionals, but also in the media and among the public. This is an understandable reaction to the indicators released by the FAO, which are setting new records, and to the prices in the stores. In a capitalist economy, the classic relationship is that between supply and the price. Until recently, this relationship also held true of the food market. Recent years, however, have seen the growing importance of inter-industry capital flows, especially those of speculative capital that has pulled out of other markets. Shortly after I took office in November 2007, a global crisis began. The crisis was different than those in the past. It first hit the agricultural market, in particular the milk market. After a rapid increase in prices, they dropped equally fast. The disruptions on this market resulted from the flight of speculative capital from the real estate and credit markets. There was a move away from the previous rules. Short- and long-term contracts are in fact only accounting records. Agricultural products are not changing their whereabouts, but are only circulating virtually in terms of accounting records. This detachment from the actual movement and delivery of individual agricultural products leads to a considerable increase in speculation in these goods. We experienced similar operations at the end of last year and the beginning of this year, it's just that capital was fleeing the market for non-ferrous metals and was entering the market for wheat, sugar and vegetable oils. This capital contributed significantly to the extremely high prices on the wheat market. This is also partly due to a significant increase in demand in Asia and Africa-a trend reflected, for example, in a 46 percent increase in grain exports from the European Union. On the other hand, the developments on the sugar market and the growing prices of sugar are the result of a misguided reform carried out in the European Union in 2006 and the outcome of a policy based on closing sugar mills and reducing sugar production in Europe. The last two examples show the natural reaction of the market to either an increase in demand or a reduction in supply. Three key factors influence the prices of agricultural products-the functioning of speculative capital, increased demand and reduced supply. But agricultural markets are also subject to a series of other factors. The example of the sugar market points to the importance of changes in the Common Agricultural Policy, which is one of the oldest EU policies that aims to guarantee food security and affordable food prices for EU citizens, and at the same time provide farmers with incomes sufficient to ensure the development of their farms. However, the last 15 to 20 years have been a period of stagnation in European agriculture-despite the fact that scientific research shows that it will be necessary to double food production in the world some 30 years from now. Not everyone is aware that planning in agriculture must be done for years, if not generations, ahead because one cannot quickly change a specific type of production. A retail facility can be built within six months and you can do business. If business trends change, you can install machines in your facility and launch production. In agriculture, restoring a pig herd, for example, takes three to four years; in the case of cattle this is seven to eight years, in the case of crop production, for example hops, it's three years from starting cultivation to obtaining the first crops. Moreover, agriculture, like no other sector of the economy, depends on weather conditions. Floods, droughts, subzero temperatures in the spring or hail can strongly dent yields. Prices paid by consumers are also affected by other factors. It should be pointed out that the retail price of food is less and less dependent on the farmer, that is the prices of agricultural raw materials. The level of processing of agricultural raw materials is increasing, leading to an increase in the cost of processing and distribution. This trend is also typical of other markets, not only the Polish one. Cost analyses show that in the case of bread, the cost of grain accounts for only 6.2 percent to 22.2 percent of the price of the end product; in the case of pasta this is only 5.6 percent to 10.6 percent. As a result, fluctuations in the prices of grain no longer have a major effect on the prices of these products. Instead the importance of other costs is growing, including energy, labor, promotion and profit margins in trade. On the market for meat products one can see that the procurement price of live pigs, for example, accounts for 25 percent to 30 percent of the retail price of the final product in the case of raw meat and for 17 percent to 21 percent in the case of smoked meats. The food chain functions along different lines. When I pointed that out three years ago, some joked that I was seeking to make retailers subject to supervision by farmers. Meanwhile, this problem applies to all EU countries and no one there questions the need to thoroughly analyze the links between individual components of the chain. Irregularities related to this lead to an increase in prices for consumers. As for this year's forecasts, one should be very careful. On the agricultural market, a further increase was recorded in the procurement prices of grain in January 2011, both compared to the previous month and in year-on-year terms. In January, the procurement prices of wheat rose by 14 percent from December and by 80 percent year on year (to zl.88.90 per deciton). Rye prices rose by around 19 percent over December and by 127 percent compared with January 2010 (to zl.73.51 per deciton); barley prices rose by around 19 percent from December and by about 96 percent compared with January 2010 (to zl.77.83 per deciton). The procurement prices of beef were about 2 percent higher than a month earlier (at zl.5.23 per kg) and the procurement prices of live poultry were nearly 3 percent higher (at zl.3.48 per kg). On the other hand, the procurement prices of pork decreased by about 5 percent (to zl.3.71 per kg). The procurement prices of milk were almost 3 percent lower, and the marketplace price of piglets for breeding fell by 6 percent. In my opinion, in the first half of this year, a further increase in food prices should be expected, although it should not be as considerable as some suggest. The price increase may range from 4 to 5 percent. By Marek Sawicki, PhD, Minister of Agriculture and Rural Development Source: The Warsaw Voice