Tuesday, July 31, 2012

Food inflation spreading across developing nations

As the world's financial markets focus on the Fed and the ECB, another threat to global growth is showing up across emerging markets. Food inflation is spreading much faster than anyone had anticipated.

The major US media outfits are focusing on US-based food price increases of a few percent and the fact that burgers in the US will end up costing more. This is certainly painful for the US consumer, but pales in comparison with the havoc food inflation will create across developing nations. What's particularly troubling is that the North American drought has coincided with a number of other droughts globally such as those in Russia, India, and even North Korea. Here are a few examples of what may look like separate news events, but are actually part of this global trend. Food inflation is setting in.

Reuters: - Brazil's broadest inflation index, the IGP-M, rose 1.34 percent in July, up from a 0.66 percent increase in June, the Getulio Vargas Foundation research group said on Monday.

The index was expected to increase 1.23 percent, according to the median forecast of 13 economists polled by Reuters. 
Brazil IGP-M inflation (YoY) (source: Bloomberg)
GS: - Consumer price inflation rose to 0.25% in July on higher food price inflation and the fading impact of the IPI tax cuts on auto prices (this more than offset the seasonal decline in apparel prices). In yoy terms, IGP-M inflation accelerated to 6.7% more than double the 3.2% March print.

Business Insider: - The drought in the American Midwest has sent corn prices soaring. And this is a very worrisome sign for Chinese pork prices.

Societe Generale analysts Michel Martinez, Wei Yao, and Jaroslaw Janecki write that nearly 90 percent of changes in Chinese domestic pork prices can be attributed to "global corn prices lagged by one quarter, and soybean prices lagged by two quarters".

Bloomberg: - Russia’s drought, which is cutting grain yields, may increase food prices and push inflation above the central bank target of 6 percent this year, according to Renaissance Capital.

Inflation may reach 6.5 percent “due to the unanticipated, and temporary, food price shock,” Ivan Tchakarov, Moscow-based chief economist for Russia and the Commonwealth of Independent States at the bank, wrote in a report today.

IRIS: - As delayed monsoons hurt production of vegetables, cereal and oilseeds, she expects WPI food (primary and manufactured) inflation, which is currently 9% y-o-y, to rise into double digits in the coming months. This will keep both WPI and CPI inflation elevated above the central bank`s comfort zone.

NASDAQ: - The country also is facing price pressures as drought in the U.S. pushes up soybean prices, and demand for food is elevated during the Ramadan fasting month. "With increasing prices of meat (products) and soybean, (on-month) inflation could be above 0.7% in July," Mr. Martowardojo said.

Sri Lanka
Reuters: - Sri Lanka's annual inflation rate may have accelerated to a 42-month high in July as a drought pushed up local food prices and a weaker rupee aggravated import bills.

Annual inflation is expected to have accelerated to 9.4 percent in July, its highest since January 2009, a Reuters poll of 13 analysts showed. In June, prices rose 9.3 percent from a year earlier.

"We will see the impact of the drought and rupee depreciation in food prices this month, too," one analyst said on condition of anonymity.

Food accounts for more than 40 percent of the basket of items used to compile inflation figures.

Other countries such as Malaysia and South Korea will see a spike in food prices as well. And of course nations like Iran will experience severe food shortages that could turn an already tense situation into an explosive one.

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