Why your T-shirts could drive food inflation

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As global food inflation surges to ever greater heights, fears are mounting prices will be driven even higher by a commodity that's not even edible: cotton.

The price of cotton is at highs not seen in more than 140 years, sparking concerns that farmers in many countries will switch their crops for the more lucrative commodity, and stop planting food staples such as corn, soybeans and sugar.

Many food stocks are already tight, and prices at record levels, because of poor weather conditions in countries such as Russia, Canada and Australia, coupled with demands for biofuel and the overall lack of investment in agriculture in many regions. Any big move by farmers will cut supplies even more and increase prices.

"I see more impact [on food prices]coming from cotton than from oil, frankly," said Abdolreza Abbassian, an economist with the Food and Agriculture Organization of the United Nations. "When farmers have to plant, now they have this really valuable other commodity that is not food and it's going to make them think. So cotton will be a part of the equation when it comes to what now increasingly is characterized as an acreage war among various crops, beans and corn included."

The FAO said Thursday its monthly food price index, which tracks 55 commodities, including grains, dairy and meat, reached a record 231 in January. That was 3.5-per-cent higher than in December, and marked the seventh straight month the index has climbed. Rising food prices have been partly to blame for a wave of protests in North Africa in recent weeks.

Mr. Abbassian said it is unlikely the index will "correct itself to anything reasonable" for several months. He added that the FAO will pay close attention to decisions farmers make this spring about whether to plant cotton or food crops.

"Spring is going to be quite a decisive time," he said. Cotton prices "make other commodities nothing in comparison."

Cotton, though down Thursday, has been surging since last summer mainly because of strong demand from China, the world's largest cotton consumer. Chinese imports have more than doubled in recent months and many Chinese farmers have held on to their cotton harvests hoping to get still higher prices. That hoarding could account for as much as 9 per cent of the world's cotton supply, according to some estimates.

Other big cotton producers, such as India, have restricted exports. And, flooding in Pakistan and Australia has also cut supplies.

The price of cotton doubled last year and it is up 25 per cent this year on the Intercontinental Exchange Inc., or ICE. The price has been moving up so quickly, ICE is proposing new restrictions on large purchases.

There are some factors working against the price of cotton. High prices have forced many mills to switch to lower-cost alternatives, such as rayon, and cotton planting in Brazil and the United States is expected to increase this year. But those extra crops aren't expected to have any impact for at least another year and cotton remains one of the world's most popular fibres.

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"If people don't have enough to eat, they only have three options: they can revolt, they can migrate or they can die. We need a better action plan," Josette Sheeran, executive director of the UN's World Food Program told reporters in London Thursday. "We think that we are in an era where we have to be very serious about food supply."

Several food companies have started increasing prices for their products to cope with the jump in commodity prices. On Thursday, John Bryant, chief executive officer of Kellogg Co., said prices for the company's cereals will increase by up to 4 per cent this year. "We are looking at long-term commodity inflation," Mr. Bryant told analysts during a conference call. "This is not a 2011 issue; this is going to continue for quite a few years."

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Cotton's climb

With cotton prices pushing all-time highs, many farmers around the world will be tempted to cash in. Cotton futures climbed 90 per cent last year and are up 25 per cent so far in 2011 because of demand from China. Planting doesn't start until spring but there are indications a lot more cotton will be grown. The Washington-based International Cotton Advisory Committee, an association of cotton-producing countries, estimates that global production will increase to 25.1 million tons this year, up from 21.8 million tons last year. Production is estimated to reach 27.3 million tons next year.

What will drop?

The most likely crops farmers would cut in favour of cotton are corn, soybeans and sugar, according to the FAO. But it's a tough call. All three have been at multiyear highs lately, mainly because of poor weather in countries like Australia, Brazil and Pakistan. Corn is also in big demand by ethanol makers, who take roughly 40 per cent of the U.S. corn crop. But weather issues were particularly brutal last year and many analysts expect prices for these three crops to fall slightly this year with a return to more normal growing conditions. Many Canadian farmers have already been switching from wheat to canola, which typically follows the price of soybeans. Canola is expected to top wheat for the first time this year in terms of total farm acreage in Western Canada.

Paul Waldie