TWN Info Service on WTO and Trade Issues (Oct08/19)
28 October 2008
Third World Network

Trade: Steep decline in food prices signals end to commodity boom
Published in SUNS #6575 dated 24 October 2008

Chennai, 23 Oct (Martin Khor) -- Commodity prices have begun to decline sharply in the past few months, at a time when the turmoil in global financial markets intensified, and as recessionary conditions took hold in many developed countries.

Data from the UN Food and Agriculture Organisation (FAO) show that for many food commodities, export prices peaked around June and have been declining since, with the price falls intensifying in the past two months. However, prices of most food commodities are still higher than a year ago, with some exceptions.

Meanwhile, the prices of many minerals and metals have also fallen significantly in recent weeks.

This raises the question whether the "commodity boom" is over and is being replaced by a new general commodity price slump. In the past year, some analysts had predicted that the world was experiencing a new commodity situation, in which high prices would be maintained because of structural factors such as the rise in demand of big developing countries like China and India.

However, other analysts had pointed to speculative activities in the commodity markets as a major factor in the steep rise in prices of many commodities, and predicted that prices would swing downwards when the commodity bubble bursts.

The FAO's latest edition of Food Price Indices reported that the FAO Food Price Index (FFPI) dropped another 6% in September, falling to a nine-month low of 188 points. The sharp decline in the index reflected the rapid decrease in international prices of all major food and feed commodities.

The FFPI rose steadily since early 2006, climbing to a record 219 points in June 2008. In spite of its continuing decline since that month, the FFPI was still up 11 points from its value in September 2007 and as much as 51 percent above the level in September 2006.

The fall in food prices overall was reflected in the decline in indices for cereals, oils and fats, meat and sugar.

After reaching a high of 278 points in June 2008, the FAO Cereal Price Index fell to 228 points in September, down 5% from August but still up 10% from September 2007. International cereal prices remained under downward pressure in September in anticipation of a strong rebound in world supplies. Developments in other markets, particularly the energy and financial markets, also contributed to the drop in prices of major cereals.

The FAO Oils/Fats Price Index fell further to 209 points in September, or 28 percent below the June record and only 10% above September 2007. The fall was due to subdued demand in response to previous record high prices, coupled with an improved global 2008/09 supply outlook. The recent downturn in energy prices and the prospect of a general slowdown in economic growth have also contributed to the price development.

The FAO Meat Price Index fell to 140 points in September, 4% below its peak in August. Meat prices rose steadily since the beginning of 2008 but rising slaughtering rates combined with a slowdown in demand have begun to put downward pressure on meat prices in September.

The FAO Dairy Price Index fell to 218 points in September, down almost 12% from August. The index has now fallen by about 28% from its peak in November 2007. Milk powder prices have dropped the most from year ago levels, with skim powder prices falling by 39% and whole milk powder by 31%. Butter and cheese prices were down 9% and 11% respectively.

The FAO Sugar Price Index averaged 173 points in September, down 7% from the previous month and 39% above a year ago. The September decline in the price index largely reflected the influence of factors outside the sugar market, namely declining crude oil prices and a strengthening of the United States dollar.

According to another recent FAO report, Crop Prospects and Food Situation (October 2008), the fall in prices of most cereals continued in September and into the first week of October.

This was largely in response to favourable prospects for 2008 harvests and thus an improvement in the supply outlook for 2008/09, but it also reflected the influence of falling crude oil prices and financial turmoil in world economies.

World cereal production in 2008 is forecast to increase 4.9% to a record 2,232 million tonnes, considerably up from earlier predictions after better than expected results from the major harvests gathered in the past two months, said the FAO.

The FAO is now predicting a possible 8% increase in world cereal stocks, reflecting that the global supply and demand balance for cereals has significantly improved in the 2008/09 season.

The report gave a detailed account of the price situation in three major cereals -- wheat, maize and rice.

On wheat, international prices continued to decline sharply. The US wheat (No. 2 Hard Red Winter, f. o. b. Gulf) averaged $308 per tonne in September, and fell to $264 in the first week of October, about 45% below its peak in March, and 25% down from October 2007.

On top of the prospect of a record world production in 2008 and large exportable supplies, falling crude oil prices and financial turmoil in world economies in recent weeks have also contributed to the decrease.

Maize prices fell further towards the end of September and in early October. The US maize (No. 2 Yellow, Gulf) averaged $229 per tonne in September, and fell to $184 in the first week of October, 35% below the peak in June, but still 13% above October last year.

According to FAO, international maize prices have been on the decline since June, when favourable global crop prospects and indications of a likely abundance of feed wheat in world markets started to pressure markets downward.

This downward trend was worsened by the sharp drop in crude oil prices, the influence of the global financial turmoil on markets in recent weeks. The latest upward revision to estimates for this season's ending stocks in the United States
(mainly because of lower feed use and reductions in domestic ethanol production) added to downward pressure.

On rice, the FAO said that expectations of record 2008 paddy crops in the northern hemisphere are keeping downward pressure on rice export prices. The price of the benchmark Thai white rice 100% B averaged $764 per tonne in September, about 3% down from August, and fell to $734 in the first week of October.

The drop in Thai prices over the past few months would likely have been more pronounced had it not been for the country's official procurement programme launched in June.

Indeed, in other export markets the slide has been much more pronounced, with quotations for similar qualities over the same period down 35% in Viet Nam and Pakistan and 16% in the United States. However, prices are still well above their values of September 2007 (by 130% in Thailand, 92% in the United States, 74% in Viet Nam and 53% in Pakistan).

The sorghum price has also witnessed a spectacular rise and fall. The price for US sorghum rose from $172 per tonne in October 2007 to $268 in June, then fell to $232 in July, $208 in September and $160 in October 2008.

Despite an improvement in the outlook for global cereal supplies in 2008/09 and the declines in international prices, FAO's latest estimates indicate that 36 countries are in need of external assistance as a result of crop failures, conflict or insecurity, natural disasters, and high domestic food prices.

The situation seems to be worst in Eastern Africa, as the outlook remains unfavourable for the cereal harvests in several countries, including parts of Ethiopia, Somalia and parts of Kenya and Uganda. Millions of food insecure people throughout the sub-region are in need of assistance. In contrast, the situation has improved in Western and Southern Africa.

Meanwhile, oil and metal prices have also been falling. The crude oil price (NYMEX) was $66.75 a barrel on Wednesday (22 October), sharply down from its peak of $140 just a few months ago. The price of copper has slumped to $1.86 a pound on 22 October, which is 54% below its peak in July and 39% below its level a year ago. +