Resources Research

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

Posts Tagged ‘wheat

How our kisans bested drought to give 252.2 mt

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RG_2016_foodgrains3_201608Bharat has maintained a level of foodgrains production that is above 250 million tons for the year 2015-16. This is the most important signal from the Fourth Advance Estimates of agricultural production, which have just been released by the Ministry of Agriculture. The ‘advance estimates’, four in the agricultural year, mark the progression from target production for the year to actual output.

For this rapid overview I have compared the 2015-16 fourth estimates, which will with minor adjustments become the final tally, with two other kinds of production figures. One is the five-year average until 2014-15 and the second is the ten-year average until 2014-15. While a yearwise comparison is often used to show the variation in produced crops (which are affected by price changes, policies, adequacy of the monsoon and climatic conditions), it is important to compare a current year’s nearly final crop production estimate with longer term averages. Doing so allows us to dampen the effects of variations in individual years and so gauge the performance in the current year against a wider recent historical pattern.

In this way we see that for all foodgrains (rice, wheat, coarse cereals and pulses) the production for 2015-16 is about three million tons below the five-year average but about 13.5 million tons above the ten-year average. These two comparisons need to be considered against the growing conditions our kisans dealt with during 2015 and 2014, both of which were drought years. They also need to be viewed against economic and demographic conditions, which have led to migration of agriculturalists and cultivators from villages into urban settlements (hence less available hands in the field), and the incremental degradation of agro-ecological growing regions (because of both urban settlements that grow and because of increased industrialisation, and therefore industrial pollution and the contamination of soil and water).

That the total quantity of foodgrains is adequate however has been due to the production of rice and wheat (चावल, गेंहूँ) both being above the five and ten year averages. There is undoubtedly regional variation in production (the February to May months in 2016 were marked by exceedingly hot weather in several growing regions, with difficult conditions made worse by water shortages). There is likewise the effects of more transparent procurement policies and stronger commitments being followed by state governments to adhere to or better the recommendations on minimum support prices. The host of contributing factors require inquiry and study.

What requires more urgent attention are the production figures for coarse cereals and pulses. Coarse cereals (which includes jowar, bajra, maize, ragi, small millets and barley – ज्वार, बाजरा, मक्का, रागी, छोटे अनाज, जौ) at just under 40 million tons is 4.4 million tons under the five-year average and 1.4 million tons under the ten-year average. Likewise pulses (which includes tur or arhar, gram, urad, moong, other kharif and other rabi pulses – अरहर, चना, उरद, मूँग, अन्य खरीफ दालें, अन्य रबी दालें) is 1.6 million tons under the five-year average and only 0.3 million tons above the ten-year average. The low total production of these crop types, coarse cereals and pulses, have continued to be a challenge for over a generation. The surprisingly good outputs of wheat (9.3 mt above the ten-year average) and rice (5.5 mt above the ten-year average) should not be allowed to obscure the persistent problems signalled by the outputs of coarse cereals and pulses.

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Regions of wheat, lands of rice

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The return of budgetary focus towards agriculture and the economies of rural India will help deepen our understanding about where crops are grown and for whom. These are still more often described in national aggregate terms of annual estimates, than by season, state and the growing appetites of urban agglomerations.

This could change over the next few years, especially as the so-called services sector shrinks both by the number of people it employs and by its importance to the national economy. Services – a peculiarly invented term that was quite unknown and unused when I was a teenager – has come about because of the financialisation of those portions of social activity which were done at small scale, informally and as adjunct activities to the work of the public sector, the manufacturers and factories, and the great numbers of cultivators (and those working on agricultural produce). The many enforced errors of contemporary economics means that this will continue to change – not without pain and confusion – but that social activity that has some economic dimension will return to what it was two generations earlier.

While it does, we find there are differences in the concentration of food staples produced – that is, how much by quantity do certain regions grow our food staples as a significant fraction of national production of that food staple. This is more readily available as state quantities instead of district. I have suggested to the Ministry of Agriculture that this ought to be monitored not only at the level of the district but also by the agro-ecological zone, or region, for we have 120 in India, and they represent varying climatic conditions, soil typologies, river basins and cultivation systems.

At present, what we see then is that for rice and wheat, the top three producing states account for 36.7% (rice) and 62% (wheat) of the country’s production. This distribution – or concentration – should cause a review of the crop choices that our kisans make in the growing districts and agro-ecological zones. For a simple pointer such as this tells us that 37 out of every 100 quintals of rice grown in India are grown in West Bengal, Uttar Pradesh and Andhra Pradesh and that 62 out of every 100 quintals of wheat grown in India are grown in Uttar Pradesh, Punjab and Madhya Pradesh.

The corresponding distribution/concentration with coarse cereals is better than wheat but not better than rice for 45.4% of total coarse cereals are grown in Rajasthan, Karnataka and Andhra Pradesh. Likewise, 48.8% of all pulses are grown in Madhya Pradesh, Rajasthan and Maharashtra. The tale is similar with oilseeds (63.8% in Madhya Pradesh, Rajasthan and Gujarat), with sugarcane (73% in Uttar Pradesh, Maharashtra and Karnataka) and cotton (69.8% in Gujarat, Maharashtra and Andhra Pradesh).

With horticulture – that is, vegetables and fruit – there is less state-level concentration to be seen. India’s kisans grow about 170 million tons of vegetables and about 85 million tons of fruit a year and their concentrations vary – West Bengal and Odisha grow a great deal of brinjal, Maharashtra grows onions, Uttar Pradesh and West Bengal lead in potatoes, Madhya Pradesh and Karnataka grow the most tomatoes, and so on. Overall however, the range of distribution amongst the large states of their produce of vegetables and fruit is not as concentrated as with the food staples. The reasons for this difference can tell us a great deal about the need for district and watershed-level food security, employing as always sound zero budget farming techniques (no external inputs) and local and indigenous knowledge of cultivation techniques.

India’s crop quotas for a rain-troubled year

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In this graphic, the size of the crop squares are relative to each other. The numbers are in million tons. Rice, wheat, pulses, coarse cereals, sugarcane. oilseeds and the fibre crops are the major categories for the 2014-15 crop production targets. What is always left out from the 'foodgrain'-based projections are vegetables and fruit, and these I have included based on the 2013-14 advance estimates for horticultural crops.

In this graphic, the size of the crop squares are relative to each other. The numbers are in million tons. Rice, wheat, pulses, coarse cereals, sugarcane. oilseeds and the fibre crops are the major categories for the 2014-15 crop production targets. What is always left out from the ‘foodgrain’-based projections are vegetables and fruit, and these I have included based on the 2013-14 advance estimates for horticultural crops.

Your allocation for the year could be 136 kilograms of vegetables, provided the monsoon holds good, which at this point in its annual career does not look likely. We need the veggies (not just potato, onion, cabbage and tomato) as much as fruit. But the central government is more traditionally concerned with ‘foodgrain’, by which is meant rice, wheat, pulses and coarse cereals.

That is what is meant by the ‘foodgrain production targets’, which have been issued by the Ministry of Agriculture for 2014-15 – as usual with scant sign of whether the Ministries of Earth Sciences and Water Resources were invited to a little chat over tea and samosas. I would have expected at least a “what do you think dear colleagues, is 94 million tons of wheat wildly optimistic given the clear blue skies that o’ertop us from Lutyens’ Delhi to Indore?” and at least some assenting murmurings from those foregathered.

But no, such niceties are not practiced by our bureaucrats. So the Ministry of Agriculture gruffly rings up the state agriculture departments, bullies them to send in the projections that make the Big Picture add up nicely, sends the tea-stained sheaf to the senior day clerk (Grade IV), and the annual hocus-pocus is readied once more. What the departments in the states say they are confident about is represented in the chart panel below, which shows you for rice, wheat, coarse cereals and pulses the produce expected from the major states. The question is: will monsoon 2014 co-operate?

Rice, wheat, coarse cereals and pulses, and the states which grow them the most, targets for 2014-15, using data from the Ministry of Agriculture

Rice, wheat, coarse cereals and pulses, and the states which grow them the most, targets for 2014-15, using data from the Ministry of Agriculture

Written by makanaka

July 12, 2014 at 18:25

Fewer cereals still for more rupees

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RG_cereal_staples_chart_20130309

The Labour Bureau of the Government of India has done us a most valuable service by disaggregating from the consumer price indices, separate indices for the individual items that a household typically buys, whether every day, periodically (weekly or monthly) and even annual purchases.

I have charted here the data for the cereal and cereal substitutes. This group consists of rice, wheat, maida (flour), suji (coarse wheat flour), bread, sewai (rice vermicelli), maize atta, wheat atta, tapioca, jowar, sago, ragi, bajra, maize, sattu (ground cereals) and the grouping of beaten or flattened rice (chira, muri, khoi, lawa (CMKL)).

The chart describes the movement – over 96 months from 2006 January to 2013 December – of the price indices (not the prices) for these foods. These are calculated as all-India prices using the consumer price index for industrial workers (CPI-IW) and the base is 2001 = 100.

There are several significant findings from examining the movement of this group of price indices. (1) Over 2008, 2009 and 2010 the rise was steadily upward with a pronounced spike in some items that lasted from 2009 August to 2010 May. This is noteworthy as no spike is visible (for the group as a whole) during 2007-08 when there was a worldwide steep rise in the prices of foods.

(2) From around 2010 May, maida, maize atta, CMKL, bread, wheat atta, rice, wheat increased at a muted rate and even remained flat over short periods whereas other cereals and cereal substitutes rose steeply and/or showed volatility in their indices. (3) From 2012 June the price indices of all items in this group rose steadily and steeply – more steeply than at any time since 2006 January and have continued this accelerated pace until the end of the recorded period, 2013 December.

This is another excellent release into the public domain of valuable indicators by the Labour Bureau which help describe the relentless rise in the prices of food staples in India. As the Labour Bureau has shown, whether it is the consumer price indices it maintains or whether it is the individual goods and services necessary to maintain an acceptable minimum standard of living for the households engaged in agriculture, manufacture or which are dependent on self-employment, the so-called ‘India growth story’ that the ruling government and its supporters speak triumphantly about in fact imposes burdens on the working classes that have grown heavier every month.

One curious question for international grains traders

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The International Grains Council's charts for all grains and major traded grains. What is the connection between these charts and local food price inflation?

The International Grains Council’s charts for all grains and major traded grains. What is the connection between these charts and local food price inflation?

The International Grains Council’s monthly Grain Market Report for 2013 October finds its grains and oilseeds index down 16% from the same period a year ago because, as the IGC has said, “the supply outlook for grains, rice and oilseeds markets is significantly more comfortable than last year”.

Recent export prices for major traded grains. Source: IGC

Recent export prices for major traded grains. Source: IGC

The IGC has raised the output forecast for total grains (wheat and coarse grains) in 2013-14 by 10 million tons this month, to 1,940 mt, up 8% from the same period last year. Demand is also expected to rise, but by a slower 5% compared to the same period a year ago. The IGC has said that “inventories are seen recovering by 39 mt to a four-year high at the end of 2013-14”.

The global trade forecast is raised by 3 mt, to 273 mt, which will exceed the previous record in 2010-11. Hence the question ought to be: if the international trade in grain collects, moves and processes just under 15% of the world’s total grain, why do prices in our local wholesale and retail food markets get influenced so much by what the IGC’s monthly report describes? This is not an answer you can expect given to you with honesty and concern from your local administration, much less from the food retail and industrial agriculture representatives.

For the major grains, here are the IGC summaries. Wheat output is expected to rise by 6% in 2013-14 from the level of a year ago and closing stocks are seen up by 7 mt, at 182mt, although this would still be below the level seen in 2011-12. The 2013-14 forecast for the global maize harvest has been raised by 5 mt this month to a record 948mt, and stocks are seen recovering to a 13-year high of 152 mt.

Rice is considered by the IGC to be “mixed, with good export demand and weather-related crop worries underpinning values in Vietnam, but Thailand’s prices fell further on limited buying interest and pressure from heavy intervention reserves”. Rice output for 2013-14 is forecast up 1% from a year ago, with world ending stocks expected to rise for a ninth consecutive year. (The IGC’s report for 2013 October is available here.)

Indexing food prices the FAO way

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The FAO food price index for 2013 October which includes the calculation and measurement changes. Spot the differences? I can't.

The FAO food price index for 2013 October which includes the calculation and measurement changes. Spot the differences? I can’t.

Why has the Food and Agriculture Organisation (FAO) changed the way it calculates the monthly FAO Food Price Index? But hold on, let us scrutinise first what the FAO Food Price Index is for 2013 October.

The FAO has said: “The FAO Food Price Index rose slightly in October, averaging 205.8 points. This was 2.7 points, or 1.3% above September, but still 11 points, or 5.3% below its October 2012 value. The slight increase was largely driven by a surge in sugar prices, although prices of the other commodity groups were also up.”

The usual blue pair.

The usual blue pair.

In substance, this sort of commentary for the FAO monthly food price index barely differs from the standard tedious template, in tone and tenor, that FAO has applied throughout 2013. The tone has been, as we begin to close 2013, that food prices have not moved very much through the year, and the tenor has been that food price volatility is being reined in.

Based on the evidence provided by real prices I experience in India – real markets (or bazaars or mandis) in which real vendors sell actual produce to real household buyers – I have no idea what the FAO Food Price Index is talking about. Nor do tens of millions of urban and rural households all over the world when they try and correlate the numbers of the FAO index to what they must confront every time they make a food purchase.

This is because of what the FAO Food Price Index measures which, I wearily point out, is a criticism levelled time and again. Why call it a food price index when it is in fact a food exporters’ and importers’ price indication?

Impressive equations, but where's the connection with the local markets you and me buy our veggies from?

Impressive equations, but where’s the connection with the local markets you and me buy our veggies from?

Now, with a change in its calculations, the FAO index includes the following 23 commodities: wheat (10 price quotations monitored and reported by the International Grains Council), maize (1 quotation) and rice (16 quotations) for cereals; butter, whole milk powder, skimmed milk powder (2 quotations for each) and cheese (1 quotation) for the dairy group; poultry (13 quotations), pig (6 quotations), bovine (7 quotations) and ovine (1 quotation) for the meat dairy group; sugar (1 quotation); the oils group consists of one oil price quotation for soybean, sunflower, rapeseed, groundnut, cotton seed, copra, palm kernel, palm, linseed and castor. This construction, thus, includes the use of 73 price series.

The FAO has said: “The Index, which is a measure of the monthly change in international prices of five major food commodity groups (including 73 price quotations), has undergone some changes in the way it is calculated, although the new approach did not significantly alter the values in the series.” (See the Food Outlook released in 2013 November.)

Perhaps. We will not know for another few months. If a change was needed that made sense to consuming households, then FAO should have ensured the index reflected what households pay for the food the buy in the markets near their homes. If the FAO must serve multiple audiences, then it must devise food price indexes for these audiences separately (but the IGC already serves the food traders, and FAO’s own Agricultural Market Information System already serves the policymakers and the major international blocs).

If global food indices are descending, why are local food prices rising?

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The trends of ten international food commodity indices from 2006 onwards.

The trends of ten international food commodity indices from 2006 onwards.

The main chart plots the course of the Food and Agriculture Organisation (FAO) Food Price Index and nine other international food price indices. These are FAO’s cereals index, the International Monetary Fund’s (IMF) food index, the International Grains Council (IGC) wheat index, the IGC’s rice index, the UN Conference on Trade and Development’s (UNCTAD) two wheat indices, Unctad’s rice index, the World Bank’s (WB) food index and WB’s grains index.

Consumer price index trends 2006 to 2013 for five South Asian countries

Consumer price index trends 2006 to 2013 for five South Asian countries

The familiar FAO blue pair for 2013 August

The familiar FAO blue pair for 2013 August

On the main chart, after 2008 December four stages are marked. The first stage is 2008 December to 2010 July, when the indices describe a plateau but which is very much higher than where they were through 2006. The second stage is 2010 July to 2011 April, which corresponds to the second global food price rise and when all these indices rose in concert. The third stage is 2011 April to 2012 September when they all declined to another plateau which nonetheless is higher overall than the last one (stage one), but which rose steeply for a short while towards the end of the stage. The fourth stage is still current, from 2012 June, which is seeing a gradual decline in all the indices to the point they were in 2011 August-September.

I have appended to the main chart the counterpoint of the consumer price indexes from South Asian countries – Nepal, Sri Lanka, Bangladesh, Pakistan and India. The question that follows, when reading the main chart with ten indices and the CPI chart for South Asia, is why the CPI trends do not follow the international grains trends. One of the major factors (which charting this data cannot reveal, as the FAO Food Price Index does not) is the extent to which the industrialisation of prmary crops sets the retail price in the markets of Colombo or Chittagong or Karachi or Mumbai or Kathmandu. Primary crop – that is, cereals, pulses, fruit and vegetable, milk and dairy – is being moved internally, processed, packaged, moved again, retailed in modern convenience stores to a much greater degree than was the case a decade ago. Those costs lie outside what the FAO-IGC-IMF-Unctad-WB indices can describe. But we need to urgently – within these countries and as a group – share methods to gauge and monitor these costs and document their impacts on households.

Does a food price index plateau signal rising real food prices?

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The short red line is more worrying than the gyrating blue line.

The short red line is more worrying than the gyrating blue line.

We have from the FAO this month (that means February 2013, released in March), the updated FAO food price index coinciding with its Crop Prospects and Food Situation. This dual release gives us the opportunity to look at the interplay between the FAO food price index and its cereals sub-index, what the ‘Prospects’ quarterly has said about cereals worldwide, and what recent index numbers seem to be telling us.

First the tale of the unfiltered numbers. The FAO Food Price Index averaged 210 points in February 2013, unchanged from January but – FAO points out with what sounds to me like mild relief – “five points (2.5%) below the corresponding month last year”. More interesting is the observation by the food price indexers that “since November the Index has moved within a narrow 210-212 point range, as increases in the prices of dairy products and oils/fats were largely balanced out by declines in the prices of cereals and sugar”.

The usual blue pair

The usual blue pair

If you dwell awhile on the chart I have made for just the cereals sub-index of the FAO food price index (above left), which traces the journey of this sub-index from 2008 January, you will see that from 2008 July it plunged and stayed low (relatively for this period) until 2010 June, and then the ascent to the 230-250 level was steep. And there it has remained. The short red line describes a cumulative average for the 12 months until 2013 February, and the trend for this ‘alarum’ (I am partial to medieval English) is quite clear, forsooth.

Since we have discussed earlier what the FAO food price index in fact describes, which is not what food consumers pay for their daily several hundred grams (if that, sadly) of staples, this does to me look like we can read a plateau as signalling persistent high and rising true cost of food to consumer. Perhaps I should petition the folks inside that citadel on Rome’s Viale delle Terme di Caracalla to rename their index into an indicator.

The leading wheat producers for 2013

The leading wheat producers for 2013

But only if they are not otherwise busy answering telephone calls (or telegrams, as they did in an earlier and far less frenetic age) about the ‘early prospects for 2013 cereal crops’ which is the star of this quarter’s Crop Prospects and Food Situation bulletin. For, here is what they have said:

“FAO’s first forecast for world wheat production in 2013 stands at 690 million tonnes, representing an increase of 4.3 percent from the 2012 harvest and, the second largest crop on record after that of 2011. The increase is expected mostly in Europe, driven by an expansion in area in response to high prices, and a recovery in yields from below-average levels in some parts last year, notably the Russian Federation.”

Cereals production in Asia

Cereals production in Asia

Elsewhere in Europe, we have been told, prospects are satisfactory in the Russian Federation (a big jump, as the chart shows). In neighbouring Ukraine, a large recovery in wheat output is forecast. In North America, the outlook in the USA has been diplomatically called “less favourable than among the other major wheat producing countries” (makes me wonder if the Prospects authors have been fraternising too frequently with UNFCCC staff). Perhaps they haven’t yet noticed the US Drought Monitor, which may explain the “aggregate wheat output is tentatively forecast to decrease” for the USA.

In Asia, the Prospects expects “a record wheat output of some 121 million tonnes in 2013” in the People’s Republic (of China, newly minus Wen Jiabao as premier). It also expects “a record wheat output” in Pakistan and “another bumper crop” in India (what will that do to the already mountainous central stocks of cereals?). Australia and wheat can be summarised (by me, not them) in a word: uncertain.

Written by makanaka

March 7, 2013 at 20:23

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

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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

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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.