HIGH, persistent and continuing rises in food prices are now posing problems around the world. It has brought forth a new term in economics: "agflation". It is the behaviour of food prices - an inflation that none of us can avoid - that some believe could rival global warming as the biggest single concern on the planet.
On the global stage, some are warning that food prices could double in the next five to ten years. "Given the expanding constraints on food supply," wrote Merrill Lynch analyst Jose Rasco in a paper this week, "the changing demand for food and the en
trance of the energy business as mass consumers of food products, it is not surprising to see food prices putting upward pressure on overall inflation."
What concerns Merrill Lynch is not the cyclical rise we have seen in inflation, but a secular price rise in the global agricultural business that may be more long-lived.
Food input prices are now putting more upward pressure on producer inflation than at any time since the early 1980s. Between March of 2005 and March 2007, the price of US wheat rose 34 per cent, corn by 47.4 per cent, barley by 59.4 per cent and cattle by 41 per cent.
This is working through to the retail level around the world. For example, in the US, food prices in the first three months of this year alone rose at an annualised rate of 7.3 per cent.
Grain prices have soared, with corn breaking through the $4 level. However, despite a surge in plantings, prices have remained high. Many agricultural experts fear that, given the increased demand for corn, especially for the production of ethanol, there still may not be enough corn available for food products.
Greater corn planting has meant cutbacks elsewhere. For example, soyabean plantings are set to fall 11 per cent this year to an 11-year low.
Food-price inflation is, in the words of one UK commentator, "an imminent and sometimes horrific reality".
In the world's two most populous countries, China and India, food accounts for 33 per cent and 45 per cent of their consumer price indices respectively. So recent prices will really be squeezing local incomes.
The changes in the world's food markets have several causes, and each means higher prices. One is the ruse of the Green movement and the growing resort to grain-produced ethanol as a fuel source.
According to the International Monetary Fund, the biofuels boom is causing corn and soybean prices to start moving in tandem with crude oil prices. "Rising demand for biofuels," it warns, "will likely cause the prices of corn and soybean oil to rise further, and to move more closely with the price of crude oil, as has been the case with sugar."
Even corn substitutes in the food chain are getting caught in the updraft, forcing up prices of edible oils, meat, dairy and chicken. As a result, the IMF is forecasting that food-price inflation is likely to remain high in 2007 and beyond.
Power generators are considering converting their oil-fired power stations to run on palm oil. But this is also found in one in ten supermarket products. Thus, if the price of palm oil rises as a result of increased demand for power generation, it would also drive up food costs.
Another cause is changing weather patterns, bringing frosts in Australia, a huge wheat exporter. The previous 100 years of data recorded none. The heat wave across the world last summer battered harvests, driving up the price of sugar, wheat, fruit, and orange juice.
Then there is third world industrialisation: every year for the last decade, China has lost fertile land equivalent to the area of Scotland.
In the UK, food items account for a greater weighting in the Consumer Price Index than is generally realised: 9 per cent compared with 6.7 per cent for fuel prices. In the year to March, the CPI inflation measure - the one used for monetary policy targeting - rose by 3.1 per cent while the headline Retail Prices Index measure rose by 4.8 per cent. Food price inflation has been pushing up both measures. Food prices in the CPI measure are up 5.6 per cent and on the RPI measure they have risen by 5.1 per cent. The same above average behaviour has persisted in the monthly comparison.
Food-price inflation has also been a big driver of the "frequent purchases" measure of inflation (up 4.9 per cent in the year to end September against 3.6 per cent on the RPI). And it also explains the similar rate of inflation (4.7 per cent) being experienced by the over 75s, for whom food is a relatively bigger item in the weekly shop.
Yet, as Dan Buglass explains below, there is little evidence of any higher prices trickling through to farmers.
The Bank of England is tackling inflation by raising interest rates - a further rise is due next week. But rising food prices are not treatable by jacking up interest rates.
Supermarkets are no longer prepared to take cost increases on the chin, and are more prepared to pass these increases on in higher prices. According to the British Retail Consortium, the price of food has risen in five of the past seven months, even while the price of non-food items has kept falling. Even the price of beef is now at levels not seen since before 1996's BSE crisis, up 3.1 per cent in a year.
Thus we are coming to the end of an era of cheap food in Britain, with consequences for pensioner households, those on low incomes and for the broader economy. Next week's expected interest rate rise will not curb the problem. It is set to make it more painful.
