Resources Research

Culture and systems of knowledge, cultivation and food, population and consumption

Posts Tagged ‘futures

Why the FAO food index is also an oil gauge

leave a comment »

The revealing relationship between the FAO cereals price sub-index, the OPEC Reference Basket price of a barrel of crude oil, and the Baltic Dry Index (right scale).

The revealing relationship between the FAO cereals price sub-index, the OPEC Reference Basket price of a barrel of crude oil, and the Baltic Dry Index (right scale).

The Food and Agriculture Organisation (FAO) of the UN has released its food price index data and commentary for 2014 October. This would be of considerable interest if only the index described the tendencies of food prices as experienced by consumers. Alas FAO’s food price index, as we have remarked upon several times in the past, pays no attention to the true cost of food staples.

Of what use is the FAO index, which is used as a reference by any government (and UN member state) to judge the value of its food exports (or to judge whether when importing grain it is paying what seems to be a fair price)? In the first place, the index (which itself is composed of separately calculated cereal, vegetable oil, dairy, meat and sugar indices) is not a consumer food price index.

The FAO food price index and its component sub-indices for the period 2012 January to 2014 October. A general downward trend, says the FAO, but this is the picture for international food trade and not consumer food retail price.

The FAO food price index and its component sub-indices for the period 2012 January to 2014 October. A general downward trend, says the FAO, but this is the picture for international food trade and not consumer food retail price.

The FAO has not claimed it is, but neither has the agency clearly and plainly said it is not. It should, because financial and general interest media all over the world report the ups and downs of this index as if it portrays how local food prices move, and of course it does not.

The FAO index is used by international traders whose business it is to buy and sell food staples (including cereal, vegetable oil, pulses, dairy, meat and sugar). Perhaps some of them use it as a benchmark while others forecast trends from its sub-indices. It may be used to validate the accuracy of a particular kind of agricultural commodity futures index, and help judge whether an investment in the production of food, its movement, its stocking or its trade is going to be a good investment or not. As you can gather, it is not an index that consumers can use, because consumers are local and this is assuredly not.

What pulls the FAO food price index up, down or sideways? There are two important factors at work on the main index. One is the price of petroleum products, the other is the cost of moving grain (or any other food staple). You may assess the short or long-term trend of the food index against the current or projected price of Brent crude (preferred in Europe), West Texas Intermediate (preferred in the USA) or the OPEC reference price (preferred almost everywhere else).

The FAO food price index and its component sub-indices for 2014 till October. The downward trend of the last six months, which the FAO commentary is faintly praising, mirrors the trend of crude oil prices over the same period.

The FAO food price index and its component sub-indices for 2014 till October. The downward trend of the last six months, which the FAO commentary is faintly praising, mirrors the trend of crude oil prices over the same period.

And then you will assess what the food price index describes against the cost of moving a large quantity of the agricultural commodity to be traded across an ocean, for which the Baltic Dry Index will be consulted.

[If you are a trader and want the FAO food price data and movements, go here. The usual commentary can be found: “The FAO Food Price Index averaged 192.3 points in October 2014, marginally (0.2 percent) below the revised September figure but 14.3 points (6.9 percent) short of its corresponding level one year ago” and so on.]

To help determine what the FAO food price index is depicting, I have made charts for the index (and sub-indices) for the period 2012 January to 2014 October; for the index (and sub-indices) for 2014 till October; a chart that shows the FAO cereals sub-index together with the OPEC Reference Basket Price for a barrel of crude oil and the Baltic Dry Index (this is the shipping index most commonly referred to for the movement of dry goods by sea) for the period 2012 January to 2014 October; and a chart that plots the changes (from month to month) in the three indexes taken together (FAO Cereals, OPEC Reference and Baltic Dry).

The FAO food price index and the OPEC Reference Basket price of oil have much more in common than the Baltic Dry Index, which has swung with volatility since 2012 January.

The FAO food price index and the OPEC Reference Basket price of oil have much more in common than the Baltic Dry Index, which has swung with volatility since 2012 January.

What they describe can be found in the captions, but it becomes clear from a glance at the FAO-OPEC-Baltic charts that the food price as calculated by FAO has very much more to do with how energy is used to produce food staples (that is, the use of petroleum products directly, and the use of fossil fuels-derived energy) and how energy is used to transport, store, process, transport it again and retail it.

I see it as an index that describes the energy quotient of industrially produced food staples, and so it has little if anything to do with any other form of agriculture, in particular the smallholder, family-oriented and organic agriculture that the FAO advertises its concern about.

Advertisements

Ten reliable rice years

leave a comment »

The AMIS prices panel as we find it in 2014 January. Weekly international rice prices (top) are for Thai rice, which have been on a plateau from 2012 Jan to around 2013 April, after which they declined. Rice futures prices (60-day average) have also been on a very gentle upward slope (middle) since 2012 Jan after pronounced swings to that point from 2010 Jan. Rice price volatility was dampened during the last quarter of 2011 until third quarter 2013 (compared to the previous two years) and has moved slowly lower over three years (bottom). Charts: FAO-AMIS

The AMIS prices panel as we find it in 2014 January. Weekly international rice prices (top) are for Thai rice, which have been on a plateau from 2012 Jan to around 2013 April, after which they declined. Rice futures prices (60-day average) have also been on a very gentle upward slope (middle) since 2012 Jan after pronounced swings to that point from 2010 Jan. Rice price volatility was dampened during the last quarter of 2011 until third quarter 2013 (compared to the previous two years) and has moved slowly lower over three years (bottom). Charts: FAO-AMIS

International grains traders rarely consider the historicity of what they deal with day in and day out. Wheat up today, maize down tomorrow, soy futures worth considering for next month, milk powder positions to be liquidated, and so on. Hold what you can profit from only so long as there is profit to be made, and futures are nothing but bets you’ve studied carefully.

But even for the hard-boiled traders, the last decade of rice has made them turn to look back and consider the curiosities of the market. Inventories of rice, all over the world, have been growing slowly and steadily for close to a decade. Now that trend, which since 2003 has been one of the longest unbroken trends in world agriculture, is ending. The change is being attributed, in the commodity exchanges and grain trading floors, to what is called a ‘downgrade’ of supplies of rice in India by the International Grains Council.

The first such forecast decline in world rice stocks, of about one million tons, means that the IGC is estimating world rice inventories at the close of 2013-14 to be 108 million tons. The curious aspect is that India is expecting a bumper rice harvest for 2013-14, and although IGC says world inventories will drop slightly (the end of the trend), there is also a reduced estimate for world consumption of rice, which is another curiosity.

According to the traders Thailand, the top rice exporter for years, has been stockpiling rice “at prices some 40%-50% above the market” and thereby prompting credit rating agencies like Moody’s to claim that the cost of the Thai programme was “threatening the country’s sovereign debt rating”.

This is plain rubbish. Traders and commodity exchanges do not grow rice to feed their families and sell if there is a small surplus to sell. The finance bots in predatory agencies like Standard and Poor’s, Moody’s and Fitch – considered the three largest by the scale of their work – don’t know the difference between a cauliflower and millet and can grow neither. Thai, Indian and African small farmers could not care less whether credit rating agencies exist and our governments should learn what true sovereignty means from our small farmers.

The FAO and IGC food price indexes and their sub-indices. For FAO the chart shows the FAO Food price Index and the cereals, oils and fats and dairy sub-indices over the last five years. For IGC the lower chart shows the IGC Grains and Oilseeds Index, also over the last five years, with the wheat, maize and rice sub-indices. The IGC rice sub-index has also recorded a plateau from 2012 January onwards with a more pronounced decline setting in from 2013 August. Charts: FAO-AMIS

The FAO and IGC food price indexes and their sub-indices. For FAO the chart shows the FAO Food price Index and the cereals, oils and fats and dairy sub-indices over the last five years. For IGC the lower chart shows the IGC Grains and Oilseeds Index, also over the last five years, with the wheat, maize and rice sub-indices. The IGC rice sub-index has also recorded a plateau from 2012 January onwards with a more pronounced decline setting in from 2013 August. Charts: FAO-AMIS

The odd tale of rice was given a late twist by two cyclones. One is Cyclone Phailin which struck the eastern Indian coast in the first week of October 2013. And he other is Typhoon Haiyan, which struck the Philippines in early November 2013. Vietnam is to supply 500,000 tons of rice to the Philippines, which has sought the supplies to boost state reserves depleted by the relief operations after Typhoon Haiyan.

The FAO’s Rice Market Monitor for 2013 November said: “Although accounting for much of the worsening in the global outlook, Asia is still expected to sustain growth in world rice production in 2013. According to the latest forecasts, the region is to harvest 672.7 million tonnes (448.6 million tonnes, milled), 1.2% more than in 2012. Foremost among countries responsible for the increase are India, Indonesia, Thailand, Myanmar and Bangladesh. By contrast, drought in China’s central and eastern provinces exacted a heavy toll on the intermediate and late rice crops, which may bring about the first production decline in the country since 2003.”

I find the FAO Rice Market Monitor more detailed than what the IGC puts out (although IGC’s public offerings are but a distillation of what subscribers to the information service obtain). The FAO Monitor has also added that given a poor delivery record so far, Thailand appears unlikely to boost its exports beyond the relatively low level of last year. And that expectations have improved for India, which may replicate the 2012 record performance, with Australia, Cambodia, China (Mainland), Egypt, Pakistan, Paraguay and the USA also forecast to export more.

A Jekyll and Hyde food price index

leave a comment »

FAO's usual winsome twosome, the food price index and food commodity price index charts.

FAO’s usual winsome twosome, the food price index and food commodity price index charts.

Why does the perversity of international food price monitoring continue when all evidence tells us food price inflation is raging just as it was in 2007-08? Here is an example of how persistent this perversity is.

Maize in Malawi at 280%, maize in Tanzania at 110%, maize in Mozambique at 60%, maize in Zambia at 50%. Wheat in Tajikistan and in Russia at 55%, wheat in Kyrgystan and Afghanistan at 40%, rice in Myanmar at 35%. Maize in Haiti at 55%, maize in Honduras at 40%, wheat and rice in Brazil at 30%, maize in Nicaragua at 30%, rice in Bolivia at 25%.

Those are the annual increases in the prices of these cereals in the countries named. The estimates come from the charts found in the FAO Global Food Price Monitor for 2013 May (which has prices for up to April). The charts however are at the end of the Monitor. On the first page, the Monitor offers very short summaries. Like this one:

“In Eastern Africa, maize prices mostly strengthened for the second consecutive month following seasonable patterns. However, prices stabilized or started to decline in some countries where new harvests are about to start.” Is that what is being described with a 110% increase in Tanzania?

Or this one:

“In Asia, domestic prices of rice and wheat generally weakened with the arrival of the 2013 early season rice and winter wheat harvests.” Is that what is being described with a 35% increase in Myanmar?

Or even this one:

What FAO's own charts tell us about rising food prices for staples worldwide. These are from the FAO Global Food Price Monitor for 2013 May.

What FAO’s own charts tell us about rising food prices for staples worldwide. These are from the FAO Global Food Price Monitor for 2013 May.

“In Central America, maize prices strengthened in April with the onset of the lean season and in some countries were at high levels. Bean prices remained low, pressured by abundant supplies from bumper crops in the 2012-13 cropping season.” Is that what is being described with a 40% increase in Honduras?

Who are these summaries really for and why does FAO persist in releasing to the public these misleading pictures of food prices (when it means export prices), and especially when its own price monitoring tools tell us very clearly that many many people are struggling under crushing inflation in the prices of food staples?

To take the food price opera further, this is what the FAO Food Price Indexwhich is one of the world’s primary indices and referred to thousands of times a day by planners, the food industry, policy-makers, bankers (always bankers), commodity traders, foreign exchange brokers, bond market artists and rogues, warehousing tycoons, the purveyors of genetically modified seed, the cigar-smoking CEOs of grain trading companies, and the smarmy corrupt political cronies of all of the above – says about cereals:

“The FAO Cereal Price Index averaged 234.6 points in April, down 10 points (4.1%) from March, but nearly 11 points (4.9%) above the corresponding period last year. Most of the decline in April was triggered by weaker maize prices on expectation of higher closing stocks and favourable 2013 crop prospects. Wheat prices changed little, as the downward pressure stemming from expectation of larger inventories was offset by the upward pressure resulting from concern over the poor growing conditions and spring crop planting delays in the United States. Rice prices were marginally down …”

Read that again, 4.9% above the corresponding period last year. The smallest of the annual percentage increases in the second paragraph of this posting is five times as much as 4.9% which is why we must ask FAO, again and again, who the beneficiaries of this large international effort to collect and distribute food prices really are.

Not the populations of Mzuzu, Kampala and Milange or Jalalabad, Yangon and Sughd, or Tegucigalpa, Sao Paulo and Jacmel, all of whom must find their own means of measuring the burdens of food price increases, and who have in the last year, cut down on health care and perhaps even the education of their children, only to not go hungry too often, too painfully.

On foodgrain stock forecasts, the IGC and USDA are both tentative

leave a comment »

Foodgrain exports forecasts for 2012-13 by the USDA's WASDE. These are the major exporting countries, exports in million tons.

Foodgrain exports forecasts for 2012-13 by the USDA’s WASDE. These are the major exporting countries, exports in million tons.

In this late February capsule of the foodgrain forecasts from the International Grains Council (IGC) and the US Department of Agriculture’s WASDE (world agriculture supply and demand estimates) we see estimates for slightly higher production, but also somewhat lower consumption. The question is: what about stocks, on which there is never enough knowledge distributed as to who holds them (government or private, traders or bankers) and how they are used by food markets or agricultural commodities markets?

Still, here is what the IGC has said:

Following minor revisions to the 2012-13 forecasts, the estimate for total grains end-season stocks (excluding rice) has been revised up by 4mt to 326m, including increases for both wheat and maize. Overall, however, they remain down 40mt year-on-year at a six-year low, or a 17-year low for the major exporters.

IGC’s 2013 February grain market report presented the first forecast for the 2013-14 supply and demand balance for wheat. “While world output is tentatively projected up 4% year-on-year, much is expected to be absorbed by higher demand and end-season stocks are likely to rise by just 2mt, following a 21m decline in 2012-13. The forecast for 2012-13 end-season maize stocks has been revised 1.7mt higher this month, but major exporters’ end-season inventories are still put at a 16-year low,” said the 2013 February report.

Here are the major foodgrain forecasts for wheat, rice, coarse grain and maize:

Wheat
According to the IGC – Major exporters’ stocks for 2012-13 are revised down by 1.5mt, to 49.9mt, but upward revisions for China and India raise the global total to 176mt, which is still down 21m from last year. Increases for Brazil, Iran and Russia help to lift the 2012-13 world trade forecast by 0.8mt this month, to 137.4m. World output for 2013-14 is tentatively projected up 4% year-on-year, but much is expected to be absorbed by higher demand leaving little room for stock building.
According to WASDEGlobal wheat supplies for 2012-13 are nearly unchanged with a small increase in beginning stocks more than offsetting a small decrease in production. Global wheat output is projected 0.7 million tons lower. Production is lowered for Kazakhstan and Brazil, but raised for Ukraine, South Africa, and Belarus. Global wheat consumption is virtually unchanged at 673.4 million tons; however, global consumption is projected down 24.6 million tons year to year, mostly reflecting lower feed and residual use in 2012-13. World wheat ending stocks for 2012-13 are also nearly unchanged this month at 176.7 million tons.

Rice
According to the IGC – At 466mt, world rice production is forecast to be little changed year-on-year, as smaller harvests in Asia, particularly in India, are offset by gains elsewhere. World use is expected to rise by 2% year-on-year, to a fresh record, underpinned by increases in Asia’s leading consumers. Global ending stocks are forecast to fall marginally, but supplies in the major exporters are expected to rise to a new record. World trade in 2013 is projected to decline by 5% as key importers in Asia and Africa reduce purchases from last year’s highs.
According to WASDE – Global 2012-13 projections of rice production and consumption are raised from last month, but trade and ending stocks are lowered. Global 2012-13 rice production is forecast at a record 465.8 million due to increases for Bangladesh, Bolivia, and Nepal partially offset by reductions for Argentina and Laos. Global consumption is raised 0.7 million tons to a record 469.3 million as relatively small changes are made to several countries including Bolivia, Iraq, and Nepal. Global exports for 2012-13 are lowered slightly due mainly to reductions for Argentina and China. Imports are reduced for Bangladesh, Cuba, Egypt, and Indonesia. Global 2012-13 ending stocks are reduced 0.5 million tons to about102.0 million due mostly to decreases for Egypt and Indonesia.

Coarse grain
According to WASDE – Global coarse grain supplies for 2012-13 are projected 2.1 million tons higher as a decrease in beginning stocks is more than offset by a 2.9-million-ton increase in production. Lower 2012-13 beginning stocks mostly reflect an increase in 2011-12 corn exports for Brazil and revisions to the Paraguay corn series that lower 2011-12 corn area and yield. Global 2012-13 production is also higher this month for sorghum, barley, oats, and rye. Sorghum production is raised 0.4 million tons for Mexico with higher area and yields for the summer crop, but lowered 0.2 million tons for Australia with reduced prospects for area and yields. Global barley, oats, and rye production are up a combined 0.6 million tons on larger reported crops for the FSU-12 countries.

Maize (corn)
According to the IGC – Global production is forecast to decline by 3% year-on-year, with sharp falls in the US and EU offsetting rises elsewhere, including in China and the southern hemisphere. Despite some less than ideal weather in recent months, Brazil and Argentina are still set to harvest record crops. Due to tighter supplies, world use is expected to dip by 1% year-on-year, led by reduced demand from the US ethanol sector. With total use again expected to exceed production, closing stocks will decline for a fourth consecutive year, including a sharp drop in the major exporters.

Written by makanaka

February 23, 2013 at 19:24

The problem with following the FAO food price index

with 3 comments

Not a man who has any time for the FAO Food Price Index. A vegetable vendor in Bangalore's Russell Market.

Not a man who has any time for the FAO Food Price Index. A vegetable vendor in Bangalore’s Russell Market.

Can a cultivator tilling a five acre plot of land in Senegal use the FAO Food Price Index? Can a vegetable vendor on the streets of Jakarta, Indonesia, use the index? Can a corner shop in Quetta, Pakistan, follow the index? Can commodity traders in the world’s most active agricultural commodities and futures exchanges use the index? My answers to these questions are: no. no. no and yes.

Why should it be this way? It shouldn’t, especially since FAO also keeps track of consumer price indices in many countries. But let’s look at why it is this way.

Our familiar pair, but who can use them?

Our familiar pair, but who can use them?

Here is what the new update to the FAO Food Price Index has said, in two words, “remaining steady” (this is the 2013 February 07 update). I quote:

“The FAO Food Price Index averaged 210 in January 2013, unchanged from the slightly revised December value. Following three months of consecutive declines, the Index stabilised in January, as a rebound in oils/fats prices offset a decline for cereals and sugar. Dairy and meat values remained generally steady.”

Concerning cereals, the update said that the cereal sub-index averaged 247 in 2013 January, down nearly 3 points from 2012 December. Now here’s an odd sentence: “The values of the monthly index have been falling since October, mostly on improved crop conditions”. We’ve read news about drought conditions all over the place, in the USA, in Australia, in Central Asia and the former Soviet Union, about unseasonal conditions in South America, for well over three months, so this sentence makes little sense. The cereals explanation added: “Large exports of feed wheat have weighed negatively on maize quotations in spite of tight availabilities”.

Now, let’s see what the FAO Agricultural Market Information System (AMIS) has said in its 2013 February Market Monitor (pdf):

“Wheat production in 2012 fell to below the 2011 record. Early prospects for 2013 point to a larger crop in spite of a possible decline in the US production. Maize production fell well below 2011 in spite of upward adjustments to the estimates in China and North America – utilisation in 2012/13 exceeding 2011/12, contrary to earlier expectations, mostly on larger feed use in China, Russia and the US. Rice production prospects for 2012 little changed, with large declines in Brazil and India dampening world growth to less than 1% – utilisation in 2012/13 still anticipated to increase by 7 million tonnes.”

Here we have what sounds like two different FAO voices speaking – the Food Price Index voice, which sees broad stability, and the AMIS voice, which sees declining production and more utilisation (as the food economists like to call it). True, the Food Price Index reflects what has occurred in the last month, and is not a forecast, but, as we see below, it is based on quotations, and not what households and small vendors actually pay for food, and there lies the rub.

Because, the FAO Food Price Index consists of the average of five commodity group price indices weighted with the average export shares of each of the groups for 2002-2004. There are in total 55 commodity quotations “considered by FAO commodity specialists as representing the international prices of the food commodities”. For the cereals sub-index, it is compiled from the International Grains Council (IGC) wheat price index, itself an average of nine different wheat price quotations, and one maize export quotation; there are three rice components containing average prices of 16 rice quotations. Fascinating yes, but relevant to those in Senegal, Jakarta and Quetta who see 60% of their monthly income being used to buy food? I don’t think so.

The AMIS has charts for daily quotations of export prices, which reveal more than the FAO Food Price INdex

The AMIS has charts for daily quotations of export prices, which reveal more than the FAO Food Price INdex

“The FAO food price index is a trade weighted Laspeyres index of international quotations expressed in US dollar prices for 55 food commodities,” explained FAO’s 2009 ‘State of Agricultural Commodity Markets, High food prices and the food crisis – experiences and lessons learned’. You see why no local translation is possible for the many hundreds of millions under the food inflation hammer.

Why the international trade and export quotations numbers dominate is revealed, in a roundabout way, by a regular paragraph in the AMIS Market Monitor. The monthly pronouncement has this to say about investment flows (that is, money chasing foodgrain), for 2013 February: “Managed money was a significant seller of wheat, maize and soybeans as futures prices attained early January lows prior to USDA stocks report”. Pay attention to that term, ‘managed money’, which means funds run by banks and big investment agencies. “Managed money reversed its position in wheat from long (bullish) to short (bearish) but maintains long positions in maize and soybeans.” Now the confusion should clear somewhat. The index helps traders and exchanges deal better with volumes of grain (and dairy and meat and edible oil). AMIS helps them with a great deal more sophistication.

And what do the primary beneficiaries of the index have to say about the FAO Food Price Index being so benign at the start of 2013? “With corn and soybean prices down sharply from drought-driven record highs reached last summer and holding ‘significant’ risk for further declines, grain farmers should consider hedging their 2013 crops earlier than normal,” is an abstract from a report by the CME Group, a company that advises investors about all kinds of commodities, including agricultural. This tells us why the FAO Food Price Index cannot serve those struggling with soaring food bills in small town Asia and Africa.

AMIS for us, we hope, but wheat and maize look scarce

leave a comment »

Welcome tables from the FAO AMIS, with USDA, IGC and FAO forecasts for major crops. Note the declines in production

The UN Food and Agriculture Organisation’s (FAO) Agricultural Market Information System (AMIS for short, although whether it Francophonically proves to be an ‘ami’ of the cereal trader or the food consuming household we shall know in the months to come) has released its Market Monitor Number 3 which is for 2012 November.

Here, in a bland paragraph that tells us nothing about the travails of households budgeting for their evening bread, ‘roti‘, or rice, the AMIS Market Monitor has said: “World supply and demand situation continues to tighten for wheat and maize but rice and soybeans have eased.”

Here’s the rest of the snapshot paragraph: “In recent weeks, unfavourable weather conditions affecting some winter wheat growing areas in the northern hemisphere and maize and soybeans in the southern hemisphere have become a concern. In addition, contradictory reports about possible export restrictions by Ukraine also influenced the market.”

Two familiar blues and a new green. The IGC Commodity Price Indices chart in the company of the FAO’s Food Price and Food Commodity Price Indices charts.

What I find useful is that the tables provided now include the USDA estimates and the IGC estimates. And moreover, in a generous display of collegial latitude (perhaps the AMIS has its good points after all) the Monitor has included the IGC index chart alongside the FAO index chart.

But as the World Food Programme (WFP) tirelessly warns, From Africa and Asia to Latin America and the Near East, there are 870 million people in the world who do not get enough food to lead a normal, active life (see the WFP’s hunger map here in Englishen français, en español. What does that do to households who are not the primary audience of the AMIS?

This report from IRIN has said that now in Pakistan, more than half of households are food insecure, according to the last major national nutrition survey. The prices of staple grains like wheat and rice have been stable but are “significantly higher” than 2011, according to the World Food Programme’s (WFP) October 2012 Global Food Security Update. A 25% rise in fuel prices has also pushed up the price of food, as it becomes increasingly expensive to transport. WFP says rising food prices in international markets recently may also lead to price hikes in Pakistan. Clearly, we need to find a way to filter the AMIS outputs (or screen its inputs) so that the Monitors are more directly useful to houseolds and their struggle to find enough healthy food at affordable prices.

Moorosi Nchejana is one of 40 farmers in the village of Mabalane in Lesotho’s Mohale’s Hoek district who participated in a pilot programme by the UN’s Food and Agriculture Organization to strengthen farmers’ capacity to adapt to climate change (June 2012). Photo: IRIN / Mujahid Safodien

Persistent high food prices and a winter’s tale of the FAO index

leave a comment »

This chart, using data from the FAO food price index and considering the period 2006 Jan to 2012 Sep, shows the four sections of price plateaus, with the longest – and most severe – being what we are experiencing now.

In this chart I have divided the period from 2006 January till 2012 September into four sections. These four sections represent different phases of the global food price rise and consequent levels of persistent food price inflation. As with all price series movements, the sections flow into and from one another, but with the five components taken together (I have omitted the sugars index, so these five are food, cereals, oils, dairy and meat) the sharp upward and downward gradients become visible. These differences help find the four different sections of prices over the last six years and nine months.

Index close-up: 2007 May to 2008 Nov

Most conspicuously, what is immediately clear from the main chart is that the current period of high food prices (and high levels of food price inflation coupled with volatility in global, regional and local food markets) began in 2010 June and established a new set of plateaus by 2010 August. It is now therefore two years of such a plateau, and the worrying indications are that, as happened in 2009 August and September, we may be on the cusp of an even higher upward movement of prices.

Index close-up: 2010 Jun to 2012 Sep

The thin lines representing averages for the five separate index components (four plus the main food index) are visible for each of the four sections. These provide more evidence of the higher overall index and graphically show the very worrisome duration of the current elevated plateau of prices – the averages for the 2010 June to 2012 September period are higher than the averages for the 2007 May to 2008 November period. Thus the optimistic pronouncements by FAO on the monthly variation in its index – such as this month’s “the FAO Cereal Price Index is 7 percent higher than in the corresponding period last year but still 4 percent below the peak of 274 points registered in April 2008” – fail to present the context, that it is not how far below the 2008 peak but how much the current average is higher than the 2007-08 average that matters.

Indeed, using the FAO food price index data released early in 2012 October (covering the period till 2012 September) this may be the FAO confirmation of the signal that the widespread droughts of 2012 have begun to affect food prices even at this already elevated level. It is all the more worrying since, in the period since 2006 January and which includes the 2007 May to 2008 November period, this is the longest period of sustained high food prices recorded by the FAO food price index. These are the long-term signals that are not conveyed by FAO’s standard monthly chart, which you can see here.

Written by makanaka

October 8, 2012 at 20:07

How the crop cultivation and food habits of 1.21 billion are being hijacked

with 4 comments

A woman sells small seasonal fruit from her basket on a bust main road in Mumbai (Bombay).

In both 2009 and well as this year, 2012, there were droughts. The impact of one drought on rural cultivating households is considerable, and we have known of the severity of these impacts ever since the chronicling of the famines of 1943-44. What happens when over a five-year period, there are two droughts? Before the end of 2012, we shall begin to know, and this will be a grim learning – drawing from the conclusions of several surveys conducted on drought and its impacts between 1970 and 2002, rural cultivating households suffer annual income losses of at times more than 60% in drought years. Can they recover enough in three years to withstand such drastic income erosion a second time in quick succession? We will learn soon enough, but the circumstances in which we learn is already being influences by major changes afoot.

Let us consider the global concern about drought and the need expressed for support to cultivating (and rural food consuming) populations experiencing drought (and food price inflation) stress. “We cannot allow these historic price hikes to turn into a lifetime of perils as families take their children out of school and eat less nutritious food to compensate for the high prices,” said World Bank Group President Jim Yong Kim in a recent statement concerning high food prices. “Countries must strengthen their targeted programmes to ease the pressure on the most vulnerable population, and implement the right policies.” The World Bank, together with other multi-lateral lending organisations and many governments worried about agrarian distress and chronic food price inflation, has spoken often about “measures and policy to protect the most vulnerable against future shocks”.

The immense sprawl of Mumbai, with over 20 million inhabitants, a food magnet that drains food producing districts up to 500 kilometres inland.

What sort of measures have been and are being discussed and implemented? They include agriculture-related investment, policy advice, fast-track financing, support for safety nets, the multi-donor food security programmes, and risk management products. The Government of India has also talked about cash transfers and increased investment in agriculture, in the same breath that it has talked about technological ‘solutions’ (the introduction of drought-resistant crop varieties, they like to call it) to surmount the yield per hectare limits currently experienced in food crop staples. How sensible or opportunistic are these measures? How true are they towards being ‘inclusive’ and ‘participatory’ (terms our government and major line ministries, including the Ministry of Agriculture and the Ministry of Rural Development, like to use)? How much are they driven by the demands of industry rather than the needs of the food insecure and price vulnerable?

Before I indicate some of the answers, it is useful to look at the conditions in the same sector in our neighbour, the People’s Republic of China.

Inside China, the country is fast approaching the limit of its own available farmland resources – the so-called ‘red line’ for food security of 120 million hectares of arable land, set by the government. China’s typical solution has been to import cheaper agriculture commodities like soybean and maize while saving its farmland for higher-value exports like fish and vegetables. But there is another force driving the rise in soybean and maize imports: the rise in meat consumption in China (a reduced example of which we are seeing in the cities and towns of India, in which the middle class diet includes a growing meat component, usually poultry). In China, meat is increasingly coming from large-scale commercial farms – not small-scale or household farmers – and is therefore dependent on animal feed rather than food waste (which has and continues to be an important portion of animal feed – think goats and chicken – for India’s small agricultural households).

From a growers’ collective in India’s Western Ghats region, a visual aid to help urban consumers identify vegetables that can be grown organically in cities.

Looking back at the pronouncements of India’s planners – whether in the Ministry of Agriculture, in the Ministry of Chemicals and Fertilisers, the directorates in states for major crops and horticulture – and its lobbyists (mostly in the chambers of commerce and trade associations) one comparison made frequently with China is seen: that our per hectare use of fertiliser is low. What they conceal is the tremendous ecological damage that has taken place in China as a result of unregulated growth in the use of synthetic and inorganic fertilisers, which has rendered toxic and sterile vast farming tracts in China. To even consider such an approach in India ought to be anathema to our farmers – but they are being pressured and coerced by a business-centric lobbying front which is alas being supported by the central government and by the governments of major states.

“Smallholder farmers are capable of producing the food necessary to feed their country, but face increasingly difficult barriers,” concluded a recent report from the international NGO Grain, which campaigns for farmers’ rights worldwide. The report by Grain added that government decisions to rely on agricultural commodity imports serve the interests of agribusiness and its need for cheap sources of feed “but threaten the land, livelihoods and local food systems of communities”. It is this linkage that lurks behind the recent ‘reform’ (a distorted and dangerous term) that now has permitted foreign direct investment (FDI) in India’s (and Bharat’s) agriculture and food retail sector.

Such changes come against a legacy of corruption concerning access to and misuse of foodgrains that deeply affect our public distribution system and with it, equitable and affordable access for our population to nutritious food. A recent report in Bloomberg, the international news agency, exposed one such fraud, which found that Rs 2,700 crore worth of foodgrain “was looted by corrupt politicians and their criminal syndicates over the past decade” in Uttar Pradesh alone. The report quoted Naresh Saxena, a commissioner to the Supreme Court who monitors hunger-based programmes across India, as having said: “This is the most mean-spirited, ruthlessly executed corruption because it hits the poorest and most vulnerable in society. What I find even more shocking is the lack of willingness in trying to stop it.” How can they begin to stop it when, in a country whose agricultural production in absolute numbers has reached ecological limits, the food retail and processed food industry continues to demand more? And will pay more for new supplies and will gratify the looters more?

A one-kilo packet of ‘ragi’ (finger millet) from an organic farm in Andhra Pradesh state, central India, packaged and labelled in a manner that provides an alternative to the premium rice brands (mostly basmati) sold in urban centres.

Imagine the psychological effect of this sort of fraud on those who work in and for our agriculture markets. The number of regulated (secondary) agricultural markets (‘mandis’) stood at 7,157 as of March 2010 (compared to just 286 in 1950). There are also reckoned to be about 22,200 rural periodical markets, about 15% of which function under the ambit of APMC (Agricultural Produce Market Committees) regulations (there are at least 27 such acts in different states). It is against this density of local collection and distribution that the impact of agri-business on inflation (both direct and indirect) may be viewed. The direct impact of agribusiness is visible in the form of food price inflation, as the Reserve Bank of India has also observed. There is demand arising from increasing population and (especially in urban and urbanising centres – see this report in a business daily, which ignores entirely the food demand footprint of urbanising India) prosperity has outstripped the growth of agricultural output, hence food inflation in India will certainly to persist and deepen (in rural areas as a result of the agri-business-led escalation of marketing channels and investment in infrastructure to move crop and food – the current government and its industry partners are doing all they can to convince middle-class urban India this is good for ‘growth’).

There is a dictatorial emphasis on food processing, on trading (consider the number of commodity exchanges today compared with ten years ago, and the much enlarged scope of their futures trading business, all of which requires access to stored raw crop that serves as the basis of such trade) and on marketing. The growing demand for protein-rich and what are called “high-value foods” (fruit, vegetables, edible oil and meat) is simultaneously raising the demand for what the food industry (processed food manufacturers, food retailers, crop terminal markets promoters, exporters) calls “high quality, safe and convenient (frozen, pre-cut, pre-cooked and ready-to-eat) foods”. Hence the view now shared by the central government, planning agencies and business and industry associations is that meeting these demands will facilitate growth (of national GDP and of the agriculture sector; see the National Summary Data Page for growth rates, however meaningless these are to the cultivating households of rural Bharat) and moderate inflation (in complete disregard of evidence from countries all over the world in which the growth of modern food retail has contributed to inflation in the prices of food staples).

The strength of the ‘growth’ totem does not diminish, and nor does the artificially inflated appeal of the ‘growth is good, more growth is better’ fiction. This is wholly and utterly misguided and mischievous and is responsible for deepening the agrarian distress in Bharat. How entrenched this fiction is can be seen in allegedly authoritative pronouncements that can be found even by the RBI, which recently said: “There is, however, near unanimity, amongst all that agriculture and agri-business growth is a necessary prerequisite for moderation of inflation, particularly food inflation, as well as for acceleration and sustenance of inclusive growth.” Growth as defined by the resource-intensive and ecologically destructive direction of the central government, Indian business and an urban middle class divorced from rural realities has directly caused this same inflation the RBI (and others) is complaining about. Yet in the policy space the contradiction is ignored – true reform that benefits Bharat rather than India is not considered.

A neighbourhood vegetable market in Bengaluru (Bangalore). How these small markets cope with the dictatorship of the food retail and food processing industry will depend on local consumers and their support.

Our central problem in the near future will continue to be the divide between Bharat and India, between food growers and the food consuming populations they support (usually unseen and unheard, often unrepresented). The English-language media that represents the interests of the well-off urban elite have become uniformly uncritical of the different aspects of agri-business and the ‘supply chain’ (another loaded term that spells danger for rural Bharat) which are being transformed (to be fair, major regional language media can be equally uncritical). Reports such as these, one from an Indian business and finance daily, Mint (which holds up GM food as the panacea for India’s food insecurity, and the other from the Wall Street Journal, which is read and quoted in business circles (which said the new ‘reforms’ are not comprehensive enough), reflect the aspirations and tendencies of urban upper middle class India and the disproportionate influence this minority enjoys over national policy, especially policy concerning agriculture and food.

These media views celebrate “rural prosperity” which is “thanks to government job schemes” (no mention of the labour distorting effect of MGNREGA (the Mahatma Gandhi National Rural Employment Guarantee Act) that is now widespread and which has pushed up farm labour costs to benefit the manufacturers of agricultural machinery – see this report for one of the implications of this cost rise, and see this compilation [pdf] by the Indian Social Institute on NREGA-related wages news), the drive for more “domestic demand from rural areas” (to benefit the consumer goods companies and their financiers primarily), the need for “better private-sector jobs in manufacturing and services”, the obsession with how to “boost purchasing power” and the tiresome illogic of “a virtuous cycle of growth”.

Charting the journey of India’s agri commodity indices to 250% in four years

with 3 comments

From 2008 January agri-commodity indexes of the NCDEX and the MCX have gained in points as described by Chart 1. From 2011 April their rise has been especially rapid, the MCX index gaining 55% and the NCDEX index gaining 86% until 2012 February. Chart: Rahul Goswami using MCX and NCDEX data re-based to 2008 January

During the course of the Eleventh Five Year Plan (2007-12) in India, the salient features of the sweeping change being quietly implemented in India’s agriculture and food structure became easier to distinguish. Many of these changes have been prefaced by the central government and its agencies pointing grimly to a farm sector that is under-performing in terms of its growth rate and which they emphasised is wanting for private sector investment.

Although elsewhere in Asia, Africa and South America the relation between food commodity trading and speculation, and continued high local food prices has been a contentious subject, India from one Plan period to the next has decided to pursue a talismanic 4% per year growth rate, attaching to this objective the idea of ‘inclusion’. The relationships between how capital is employed in the food and agriculture sector, what in fact happens to agricultural produce during its journey to urban shops, and the reasons for the steady rise of agri-commodity futures indices in India are still only irregularly researched.

Profiting from speculation in food staples – and protecting the household from the effects of hoarding – is behaviour that is the subject of legislation from 1955 when the Essential Commodities Act came into force, and also from 1980 with the Prevention of Black Marketing & Maintenance of Supply of Essential Commodities Act. The recent changes in agriculture and food however, employ many simultaneous mechanisms and methods, which legislation from an earlier era can only partly forestall.

[From ‘Food and Agriculture: Trends Into the Early Twelfth Plan’, a forthcoming paper.]

Iran’s oil, Europe’s oil imports, many threats, upward prices

leave a comment »

Iranian President Ahmadinejad punches the air in front of a banner of Iran's Supreme Leader Ali Khamenei during rally to mark the anniversary of Islamic Revolution in Tehran. With its threat to block the Strait of Hormuz, Iran is responding to the United States' decision to impose sanctions on financial institutions that deal with Iran's central bank. Photo: Der Spiegel / Reuters

The concern about the multi-bloc confrontation with Iran (the Islamic Republic of, to use the official name) has continued from December 2011 into January 2012. Oil prices and petroleum products markets have been affected. There have been oft-repeated and serious concerns that there could be some armed confrontation, especially involving Israel and Iran. There has also been speculation that Iran’s government would block the Strait of Hormuz, through which about a third of all crude oil shipped worldwide passes. Some of these concerns have abated in the last week, but only partially.

Now, Der Spiegel has reported that although the European Union embargo on Iranian oil will only come into effect in six months, the leadership in Tehran wants to act first: Exports to Europe are set to be halted immediately. It is a move which could mean added difficulties for struggling economies in southern Europe. The Iranian government wants to present a bill to parliament this weekend calling for an immediate halt to oil deliveries to Europe. The move, with most reports citing the Iranian news agency Mehr, has come about in response to the EU agreement to impose sanctions against Iran, which were announced earlier this week.

The sanctions banned any new contracts for buying oil from Iran, but allowed existing deals to continue until July in order to give countries time to find other sources. But that process is now at risk after the latest move from Tehran, a step the Iranian government had already threatened. “If this bill is passed, the government will be forced to stop selling oil to Europe before the actual implementation of their sanctions,” said Emad Hosseini, spokesman for the Iranian parliament’s energy commission, reportedly said. The bill is set to become law on Sunday.

An oil tanker is seen docked next to Iraq's vital al-Basra oil terminal, in Persian Gulf waters. Four decades after the 1973 oil shock, Iran and the West are once again embracing oil as a weapon. Tehran is threatening to block the Strait of Hormuz, while the industrialized countries are considering a boycott of Iranian oil. Photo: Der Spiegel / AP Photo/Kamran Jebreili

The EU sanctions allow for oil deliveries from Iran until July 1. Any pre-empting of this timescale by Tehran could prove problematic for countries like Italy, Greece and Spain, who would need to urgently find new suppliers. China, meanwhile, a major importer of Iranian oil, has also criticized the EU sanctions. The Xinhua news agency quoted the Chinese Foreign Ministry on Thursday as saying: “To blindly pressure and impose sanctions on Iran are not constructive approaches.” Many members of the EU are now heavily dependent on Iranian oil. Some 500,000 barrels arrive in Europe every day from Iran, with southern European countries consuming most of it. Greece is the most exposed, receiving a third of all its oil imports from Iran, but Italy too depends on Iran for 13 percent of its oil needs. If this source were to dry up abruptly, the economic conditions in the two struggling countries could become even worse.

Iran holds around 137 billion barrels of proven oil reserves, or nearly 10 percent of the world total, according to the BP Statistical Review of World Energy 2011. Despite sitting on the world’s second largest reserves of natural gas, Iran’s growing appetite for its own gas, combined with tightening international sanctions that have throttled its fledgling liquefied natural gas (LNG) programme, have made it a net gas importer for most of the last decade. Natural gas accounts for 54 percent of Iran’s total domestic energy consumption, while most of the remainder of energy consumption is attributable to oil, according to the U.S. Energy Information Administration (EIA).

Graphic: Der Spiegel / Reuters

The Gloria Center’s Barry Rubin has said that the claim of Israel being about to attack Iran repeatedly appears in the media (see his article, ‘Israel Isn’t Going to Attack Iran and Neither Will the United States’). “Some have criticized Israel for attacking Iran and turning the Middle East into a cauldron of turmoil (not as if the region needs any help in that department) despite the fact that it hasn’t even happened,” he said. “On the surface, of course, there is apparent evidence for such a thesis. Israel has talked about attacking Iran and, objectively, one can make a case for such an operation. Yet any serious consideration of this scenario—based on actual research and real analysis rather than what the uninformed assemble in their own heads—is this: It isn’t going to happen.”

Rubin said that the main leak from the Israeli government, by an ex-intelligence official who hates Prime Minister Benjamin Netanyahu, has been that the Israeli government already decided not to attack Iran. Israeli Defense Minister Ehud Barak has publicly denied plans for an imminent attack as have other senior government official. “Israel, like other countries, should be subject to rational analysis. Articles being written by others are being spun as saying Israel is going to attack when that’s not what they are saying.”

So why are Israelis talking about a potential attack on Iran’s nuclear facilities, Rubin has asked. Because that’s the only way Israel has to pressure Western countries to work harder on the issue, to increase sanction and diplomatic efforts, is his answer.

A satellite image of the Persian Gulf. About a third of all the crude oil shipped worldwide passes through the Strait of Hormuz between Iran and Oman. Photo: Der Spiegel / DPA / NASA / The Visible Earth

Bloomberg provided a round-up of Iran-related oil and prices news – oil declined a second day in New York as rising U.S. crude inventories countered data showing gasoline demand increased last week in the world’s largest oil consumer. Futures fell as much as 0.9 percent after dropping 0.6 percent yesterday. Crude stockpiles probably rose last week as imports rebounded, according to a Bloomberg News survey before an Energy Department report today. U.S. gasoline demand grew for a second week, MasterCard Inc. data showed yesterday. The European Union embargo on Iranian oil supplies will “bear bitter fruit,” Iran’s Foreign Affairs Ministry said this week.

Ria Novosti, the Russian news agtency, quoting a CNN report, said the United States will use all available options to prevent Iran from getting a nuclear weapon, President Barack Obama said in his State of the Union address on Tuesday. “Let there be no doubt: America is determined to prevent Iran from getting a nuclear weapon, and I will take no options off the table to achieve that goal,” Obama said.

The New York Times reported that as the Obama administration and its European allies toughened economic sanctions against Iran on Monday — blocking its access to the world financial system and undermining its critical oil and gas industry — officials on both sides of the Atlantic acknowledge that their last-ditch effort has only a limited chance of persuading Tehran to abandon what the West fears is its pursuit of nuclear weapons. “That leaves open this critical question: And then what?”

Fox Business has reported that the International Monetary Fund warned on Wednesday that global crude prices could rise as much as 30 percent if Iran halts oil exports as a result of U.S. and European Union sanctions. If Iran halts exports to countries without offsets from other sources it would likely trigger an “initial” oil price jump of 20 to 30 percent, or about $20 to $30 a barrel, the IMF said in its first public comment on a possible Iranian oil supply disruption.

Graphic: Der Spiegel / Reuters

Impacts on refining in Europe was reported by Bloomberg – the European Union’s embargo on Iranian oil threatens to accelerate refinery closures in Europe, the head of Italy’s refiners’ lobby said. “Asian countries not applying the embargo could buy the Iranian oil at a discount and sell cheap refined products back to us,” Piero De Simone, general manager of Unione Petrolifera, said in an interview in Rome. “Italy already risks the closure of five refineries and at a European level we’re talking about 70 possible shut downs.”

Brinksmanship over Iran’s threat to close the Strait of Hormuz sparked a rally in oil prices at the end of last year, The National of UAE reported, with sabre-rattling by Iran and the US sending the price of Brent crude futures to highs of US$111.11 per barrel. Saudi Arabia looks set to benefit from sanctions against Iran as the kingdom is one of the few oil producers with capacity to make up any shortfall they will cause. Meanwhile India’s oil minister said Wednesday the energy-hungry nation was continuing to import oil from Iran and was not bound by new sanctions imposed by the European Union.

Reuters provided a factbox about Iran’s oil exports as OPEC’s second largest producer. Iran sells large volumes of oil to China, India, South Korea, Japan and Italy. But Greece, Turkey, South Africa and Sri Lanka rely most heavily on Iranian oil as a percentage of imports. Sri Lanka imported 39,000 bpd in the first half of the year, IEA data shows. It is completely reliant on Iranian oil.

EU figures show imports of Iranian crude were up more than 7% in the third quarter of 2011 compared to the second quarter. The EU says it imported about 700,000 bpd of Iranian crude oil in the third quarter of 2011, compared to about 655,000 bpd in the second quarter.

The European Union agreed on Jan. 23 to ban Iranian oil imports, but the embargo will not be fully implemented until July 1, to avoid harming economies to whom Iran has been a major supplier. The EU move follows new financial sanctions signed into law by U.S. President Barack Obama on Dec. 31, which aim to make it difficult for countries to buy Iranian oil in an attempt to discourage Tehran’s nuclear programme.

Iran produces about 3.5 million barrels per day (bpd) of crude with another 500,000 bpd of condensate – light hydrocarbon liquids. Iran exports about 2.6 million bpd, of which about 50,000 bpd is refined products, the International Energy Agency (IEA) estimates. The top 10 buyers of Iranian crude last year were as follows:

An Iranian oil technician makes his way at the oil separator facilities in Azadegan oil field, near Ahvaz, Iran. Photo: Der Spiegel / AP Photo/Vahid Salemi

Country – Imports (bpd) – % Imports
1. China – 543,000 – 10
2. India – 341,000 – 11
3. Japan – 251,000 – 5.9
4. Italy – 204,000 – 13.2
5. South Korea – 239,000 – 7.4
6. Turkey – 217,000 – 30.6
7. Spain – 170,000 – 16.2
8. Greece – 158,000 – 53.1
9. S.Africa – 98,000 – 25
10.France – 75,000 – 6.0

[Figures for EU countries are from the bloc’s Eurostat office and are for the third quarter. Figures for other OECD countries are from the IEA and for the second quarter. Figures for China, India and South Africa are for the first half of 2011 from the U.S. Energy Information Administration (EIA).]