Where are food costs heading? Try looking at the price of crude

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We live in a world of abundance and food has been getting cheaper every year. If you are not a prairie farmer, you probably won't have noticed, and if you live in drought-stricken areas of southern Africa, you might think it's a bad joke.

But it's true – the global price of staple foods, such as grains, oils, meat and dairy products, has been falling steadily for three years. According to the food price index published monthly by the United Nation's Food and Agricultural Organization (FAO), the sharp declines of recent years have almost entirely reversed the sudden food price surges of 2008 and 2011. In real terms, food staples are back to normal long-run price levels and the big question is whether they remain in that steady state or get bounced around in another bout of commodity price turmoil.

It's important to understand that these are the costs of globally traded commodities, such as wheat, rice, palm oil, sugar, beef and pig meat, priced in U.S. dollars. Over the past year, Canadians have seen the cost of their weekly grocery bill climb sharply, mainly due to the slump in the Canadian dollar. In Britain, the opposite has been true with supermarket prices falling by as much as 13 per cent over four years. The cost of some staples such as eggs or milk has collapsed in Britain and the general price deflation has been exacerbated by supermarket wars.

Local markets have a big influence on food, especially so in the case of fresh produce, and in southern Africa, a prolonged drought made worse by the El Nino weather system is playing havoc with food production already weakened by conflict and bad government. Still, the price collapse of the past three years demonstrates that where trade is allowed to work and where farmers are able to respond to price stimuli with increased planting, the trend has been higher yields and falling prices.

Yet, in recent months, the FAO price index has begun to edge upwards. Again, this may be normal volatility due to El Nino-related weather and a specific issue with sugar but it also coincides with the recent upsurge in the price of oil. There is a noticeable correlation between the cost of energy and the cost of food – farming is an energy-intensive industry requiring large inputs of fuel for machinery and equipment as well as chemical fertilizer and the logistical chain needed to get produce from farm gate to supermarket.

Other factors, such as supply, affect food prices and we know that many countries, notably China, have built up huge stockpiles of rice, corn and wheat as part of a price management policy, designed to protect the incomes of poor farmers. The paranoid bureaucrats in Beijing will reveal nothing about food stocks but reports suggest the mountain of corn now equates to a year's supply and there are fears that unwinding the stockpile could further undermine already weak global corn prices.

Still, some people believe that even the machinations of mandarins are nothing compared to the effect of energy on the cost of our food. Following the surges in food prices in 2008 and 2011, the World Bank investigated how external factors, such as energy costs, interest rates, currencies and stock levels affected the price of corn, wheat, rice, soya and palm oil. The research found that while stocks were important, the biggest impact was energy, pointing to the magnitude of the leap in oil prices after 2004, which the World Bank reckoned accounted for two-thirds of the subsequent rise in food prices.

What the record also tells us is that the past five to six years have been an anomaly. The history of global agricultural prices in the second half of the twentieth century was mainly stable prices with new plant breeding technology rapidly accommodating the needs of population growth. Meanwhile, hunger has been caused by war, bad government and the lunacy of rigid economic planning, as well as hindrances to trade and natural disasters.

Everything, therefore, seems to point to more food abundance and low prices, the reversion to the steady state. Global population growth is slowing rapidly and biotechnology offers the promise of plant varieties that can cope better with drought and disease. The wild card is energy costs; for Canadians, a strong oil price surge followed by agricultural cost inflation and a global shortfall in cereal harvests might sound like heaven. However, if it pushed a weak world economy into recession, the pleasure would be short-lived.

Far better for Canada to get used to the steady state of weak commodity prices, become a more efficient producer and climb up the value chain to a place where the price of a barrel of crude oil no longer matters much.

Carl Mortished is a Canadian financial journalist based in London.