With drought threatening food production in the EU, US and China, analysts at Renaissance Capital believe the next 8-10 weeks will be crucial to prices in 2011 and 2012.
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Wheat field
“The food price threat for 2011-2012 is very significant, but may disappear in August. It depends entirely on the weather over May to July,” said Renaissance Capital’s Charles Robertson.
“If we do not get the right mix of rain and sun in the coming 8-10 weeks, then later this year we will see record price levels for the most important cereal in the world today – corn,” he said.
If this were the case, Robertson believes prices for wheat and other cereals could also see record prices.
“This in turn would cause record price levels for wheat, as well as other cereals. This would be bad news for everyone, except those lucky farmers in countries likely to enjoy a relatively good harvest in 2011, which will include Russia and probably Ukraine,” said Robertson.
With a far larger percentage of income spent on food in emerging markets, record prices would have a disproportionate impact on the world’s poorest.
“Already food prices have been a driver of higher global inflation, though central banks have tried to look through this, arguing that a good 2011 harvest would see food prices fall again,” said Robertson.
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“They may be right. But if they’re wrong, the spillover effects from two years of rising food prices would likely drive all prices higher and trigger interest rate rises and further currency appreciation.”
“Better weather could result in a 40 percent fall in corn prices and a 30 percent decline in wheat prices, but we see only a 20-25 percent chance of this,” he said.
“The worst-case scenario (5-20 percent chance) of corn prices rising by 100 percent, or wheat jumping 40 percent, would probably involve dire harvests in the US, the EU and China,” said Robertson.
