Posts Tagged ‘stock’
The problem with following the FAO food price index

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.
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 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.
FAO’s March 2011 food price index, anomaly or turnaround?
Global food prices decline, is the assessment of the Food and Agriculture Organisation (FAO) for 2011 March. The FAO Food Price Index has shown its first decrease in eight months. “The food price index dropped some this month but only time will tell if this is the start of a reversal of the upward trend,” said FAO.
The Index averaged 230 points in March 2011, down 2.9 percent from its peak in February, but still 37 percent above March of last year. “The decrease in the overall index this month brings some welcome respite from the steady increases seen over the last eight months,” said David Hallam, Director of FAO’s Trade and Market Division. “But it would be premature to conclude that this is a reversal of the upward trend,” he added.
“We need to see the information on new plantings over the next few weeks to get an idea of future production levels. But low stock levels, the implications for oil prices of events in the Middle East and North Africa and the effects of the destruction in Japan all make for continuing uncertainty and price volatility over the coming months,” said Hallam.
International prices of oils and sugar dropped the most, followed by cereals. By contrast, dairy and meat prices were up, although only marginally in the case of meat. The Cereal Price Index averaged 252 points in March, down 2.6 percent from February, but still 60 percent higher than in March 2010. March was extremely volatile for grains, with international quotations first plunging sharply, driven largely by outside market developments such as the increased economic uncertainties accompanying the turmoil in North Africa and parts of the Near East as well as the Japanese earthquake and tsunami, before regaining most of their losses. Rice prices also fell as a result of abundant supply in exporting countries and sluggish import demand.
A positive outlook but food stocks diminish, said the FAO. World production of cereals fell in 2010, resulting in falling stocks, while total cereal utilization is expected to reach a record level in 2010/11. While most indications point to increased cereal production in 2011, the projected growth may not be sufficient to replenish inventories, in which case prices could remain firm throughout 2011/12 as well.
Index details: The FAO Food Price Index (FFPI) averaged 230 points in March 2011, down 2.9 percent from its peak in February, but still 37 percent above March last year. International prices of oils and sugar contracted the most, followed by cereals. By contrast, dairy and meat prices were up.
The FAO Cereal Price Index averaged 252 points, down 2.6 percent from February, but still 60% higher than in March 2010. The past month was extremely volatile for grains, with international quotations first plunging sharply, driven largely by recent events in Japan and North Africa, before regaining most of their losses towards the end of the month, as markets reacted to a continuing tight world supply and demand condition. Rice prices also fell amid large availability in exporting countries and sluggish import demand.
The FAO Oils/Fats Price Index fell 7 percent, to 260, interrupting nine months of consecutive rise. Last month’s slide in prices reflects primarily a recovery in global supply prospects for palm oil. The FAO Sugar Price Index averaged 372 points, down as much as 10 percent from the highs of January and February. The recent decline in international sugar prices was partly prompted by prospects of increased market availability, notably from India.
The FAO Dairy Price Index averaged 234 points, up 1.9 percent from February and 37 percent above its level in March 2010. Firm import demand together with lower than expected production in Southern hemisphere supplying countries, where the milking season is coming to a close, continue to underpin world prices. The FAO Meat Price Index was little changed at 169 points in March. The upward trend in meat prices since 2010 has flattened in the past few months, reflecting trade disruptions in several key markets, particularly North Africa and Japan.