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DAVID KRUSE

By Staff | Jan 28, 2011

The U.S. has imported deflation though buying foreign goods at lower prices; and exported inflation by sending cash overseas that found its way into new demand for commodities, raising prices.

Food prices rose 11.7 percent in China in November. Food price inflation topped 18 percent in India last month. The United Nations Food and Agriculture Index of monthly food prices topped the June 2008 high in December, an all time high.

The FAO food index was up 6.4 percent for cereal grain prices in December. It’s not surprising that food price inflation is the most evident where economic growth is creating droves of new consumers and new demand for commodities.

The food price inflation is a sign of successful economic growth in emerging economies and China. They are now tasked with balancing accelerated economic growth with accelerated inflation.

The first thing a human being does when he receives an income where none existed before is purchase food to improve his diet. Therefore, the strong rate of economic growth seen in China and India is producing income, creating a surge of new consumers who are increasing their caloric intake.

Food inflation is not yet a major problem to U.S. consumers. The U.S. economic growth rate is slow compared to China and emerging nations. Countries have different options available to curtail food price inflation, but as long as high economic growth rates exist in developing countries, food price inflation will persist.

Governments turn first to regulating speculation, so that nobody is getting rich off the misery of others. Yet China, which is building food reserves, is essentially practicing state hoarding of commodities.

Speculation is a response to, rather than a root cause of, food price inflation. Most politicians’ demagogue on the evils of speculation, proof we are lead by fools. There is a line between predatory speculation and allowing markets to provide producers the financial incentive to increase production capacity.

To meet the global growth in food demand, the world changed for the better as globalization allowed unprecedented wealth creation in regions and populations of the world who had long languished in poverty.

Growth in demand for food, fuel and fiber has taxed existing production capacity to limits. Expanding food production capacity with high intensity use of crop inputs, more land transformation and greater biotechnology adoption takes time.

While developing economies are leading food inflation because that is where the source of surging new demand is coming from, they will meet this demand in part, from boosting imports, competing for world food supplies in the market place with traditional consumers.

Despite buying and importing every soybean they could physically import last year, cooking oil prices in China still climbed 27 percent. That will cause food price inflation to spread to developed nations causing inflation rates to rise in Europe and the U.S. as China buys food stocks in world markets raising prices to import more stocks to control domestic prices.

In the deflationary period of the 1980 through 1990s, U.S. consumers had world commodity markets all to themselves, abundant supplies and excess commodity production capacity. People forget that Bill Clinton passed on buying $8/barrel oil to add to the Strategic Petroleum Reserve.

U.S. consumers bought food and fiber below the cost of production. France is reportedly considering export controls on wheat to control domestic supply, which would only inflame global inflation all the more. This is a fool’s policy too.

The commodity cycle has come full circle. It is difficult to begrudge food demand coming from hungry people who want to improve their diets. If China comes after the corn market or pork market the way they have soybeans, U.S. consumers will experience food price inflation stemming from this competition firsthand, finding out that pork, chicken and beef are cheap commodities today relative to the developing economies.

The potential risk to derailing commodity markets is virtually only focused on a slow down in economic growth in the economies that have generated the surge in global commodity demand. Little by little, world food, fiber and fuel production capacity has been consumed so that there is no surplus of anything with tight stocks of everything.

Weather risk to markets inflated by tight carryovers and limited ability to expand acreage short term has never been greater.

World agriculture and commodity production has so far, successfully met demand levels, albeit at higher prices for commodities. No enduser has yet been denied the commodity they need, forced to go without, which contracts the demand base. We are one drought or flood from forced rationing, as carryover stocks provide too thin a buffer.

How do we meet unprecedented global demand with the crop resources available to producers in 2011? High sustained grain prices would cause U.S. producers to plant marginal acres to crops, pour on crop inputs to produce maximum yields, investing any dollar into production that will produce a higher yield and return.

Farmers need that incentive and anything less will produce less than maximum potential results.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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