Global food prices fell for the first time in nearly a year last month, but the reprieve won't last long and prices are already heading back up even as farmers plant more crops than ever.
The U.N Food and Agriculture Organization's Food Price Index fell 2.9 per cent in March. That was the first monthly decline since last June and it marked a rare halt to what had been a run of record highs.
The index, which tracks 55 commodities, dropped mainly because prices for most grains and oilseeds fell in March as a result of turmoil in North Africa and the earthquake in Japan. Both events raised concerns about the global economy and food imports in those regions. As a result, prices for food staples such as corn, soybeans and wheat began falling for the first time since last summer.
By the end of March those prices started turning back up. This week corn hit a record high of $7.73 (U.S.) a bushel on the Chicago Board of Trade, while wheat and soybeans have jumped as much as 8 per cent in the past few days.
"It is very hard to think that we are out of the woods yet," said FAO senior economist Abdolreza Abbassian, referring to food prices. "I think it's more likely [the March index]was just a short-lived break in the increase."
Mr. Abbassian and others have been particularly surprised at how commodity prices have started climbing even as several recent reports indicate farmers will grow massive crops this year.
Farmers in the United States are expected to plant some of the largest corn and soybean corps in history, according to figures released on Thursday by the U.S. Department of Agriculture. Growers in Brazil and Argentina have also enjoyed bumper harvests and wheat production is up in China, Russia and the Ukraine. India is also enjoying strong rice harvests.
And yet, all that added production can barely keep up with demand.
On the same day the USDA predicted farmers will grow near record crops of corn and soybeans, the agency said inventories of both are plummeting. The excess supply of corn has dropped 15 per cent in the past year and is at a 15-year low. Soybean inventories are at record lows and both crops are expected to remain in tight supply this year. Canola inventories are also down, leaving wheat as one of the few major grains still in decent supply. But that could change as farmers switch from wheat to more lucrative crops.
"I think [low inventories are]going to be the supporting factor underpinning prices all the way up to the harvest," Mr. Abbassian said. "Because there is no sign of rationing irrespective of prices being so high."
Corn is by far the most important crop grown in the United States and the price is being driven by three factors: ethanol production, exports to China and demand from cattle ranchers who use corn in animal feed. All three are showing no sign of slowing despite record prices. Ethanol is expected to consume up to 40 per cent of the U.S. corn crop, China keeps buying boat loads of corn and cattle ranchers can afford to pay more for feed because meat prices are pushing record highs.
"We have very tight stocks in corn," said Jerry Klassen, a Winnipeg-based commodity analyst at GAP S.A. Grains & Products. He said corn needs to go $9 or $10 a bushel before demand would be significantly affected. That's the price where ranchers in particular would start to find other feed alternatives.
Low inventories also mean food prices will be vulnerable to even minor disruptions such as flooding or droughts, said David Sparling, chair of Agri-Food Innovation and Regulation at the Richard Ivey School of Business. "The world gets a little more nervous when we have low inventories," he said.
Mr. Sparling added that consumers should get used to long-term food inflation. "I don't think there's any doubt that we are going to be seeing higher prices," he said. "Everything is aligned."