[DEBATE] : Higher Food Prices May Be Here to Stay
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Sat May 3 10:36:16 BST 2008
Higher Food Prices
May Be Here to Stay
By PATRICK BARTA
April 14, 2008; Page A2
For all the economists and consumers who hope high food prices are
temporary, here's one reason why they probably won't be: Farm costs
are skyrocketing, making permanently higher prices essential for
farmers to keep expanding production.
Inflation is biting farmers world-wide. In New Zealand, farm wages are
up as much as 20% this year, and the average price of a dairy cow has
jumped to more than $1,900 -- almost double last year's average of
about $1,000. In Thailand and Indonesia, farmers are complaining about
sharp increases in the price of fertilizer and diesel fuel.
In the American Midwest, land prices have jumped, along with the cost
of energy and chemicals. The price of diammonium phosphate, a common
fertilizer, is about $1,200 a ton in the U.S., up from about $450 a
ton a year ago.
"Diesel, fertilizer, insecticide, grass-killing chemicals, they're all
going up -- just like a shadow," says Samear Ruengrit, a 57-year-old
farmer who grows rice about 45 minutes north of Bangkok. His average
costs are now about 50% higher than last season, he says.
Farming costs are climbing for several reasons. Higher fuel prices
make it more expensive to run tractors and other equipment, while
pricier natural gas -- needed to make some fertilizers -- has also
played a role. Equipment prices are rising because of strong demand
for farm machinery in China and other developing countries, along with
rising costs for raw materials like steel.
Wages are up in some parts of the world because many farms are
expanding to meet higher demand, putting pressure on labor supplies,
especially in countries like Australia where many workers are already
occupied in commodity-based trades like mining.
Cost pressures have intensified over the past six months. Many farm
suppliers and equipment dealers held back on price increases in 2006
and 2007, despite their own higher energy and labor costs. Now, after
a year or more of strong markets for corn and other crops, those
suppliers are deciding farmers can afford to pay more -- and they are
passing costs along.
Many farmers were able to postpone cost increases through hedging or
by buying fertilizer, chemicals and other supplies in bulk in 2006 or
2007, when they were cheaper. Now those strategies are hitting their
limit as the stockpiles run down.
"Growing Burden: Average US Price for Diammonium Phosphate Fertilizer":
The higher costs are transforming the economics of agriculture. Since
some of the heftier outlays -- like those for fuel -- are expected to
persist, farmers will need to command higher prices for their crops
than they did a few years ago to maintain their profit margins.
For consumers, all this means continuing pain from high-food costs, at
least for the foreseeable future. Rice prices have more than doubled
since the beginning of 2008, causing some farmers to hoard their crops
in hopes of further windfalls, pushing prices even higher.
Food-inflation protests have rippled across the developing world,
including Haiti, Mexico, Indonesia, Egypt and Pakistan.
A similar cost spiral has played out in other commodities markets,
notably those for minerals. Rising costs "are sweeping across the
commodities complex, and agriculture can't escape it," says Michael
Lewis, global head of commodities research at Deutsche Bank in London.
The upshot, he says, is "a complete structural shift" in agricultural
prices to a new, higher level.
None of this means food prices can't fall somewhat from current levels
-- indeed, many economists believe they will, as the world economy
slows and new farms come into production. If the U.S. slides into a
deep economic malaise that triggers a world-wide recession, prices of
most commodities probably would fall.
Even so, economists say the magnitude of the recent cost increases
suggests it will be hard for farm prices to return to their lower
levels of the late 1990s and early 2000s, amid a financial crisis in
Asia and a recession in the U.S.
Indeed, consider what happened in the mid-1980s, when crop prices
collapsed following a sharp run-up in the 1970s. Corn fell to less
than $1.60 a bushel in 1986 from a high of more than $3 a bushel a few
But within about two years, corn and wheat prices rebounded. Corn
settled above $2.25 a bushel for much of the next decade, well above
its price of less than $1.25 before the 1970s farm boom began -- the
same kind of long-term upward shift in prices many economists expect
The problem for many farmers back then was that costs also stayed
high, eating into profit margins and forcing many out of business.
That merely underscores how dangerous high costs can be for farmers.
Added costs often take a while to materialize during the early years
of a farm boom, allowing growers to cash in on big profits during the
early stages -- much as they have over the past two years.
But they also tend to stick around for a long time, even after some of
the forces that drove crop prices higher have faded. That exposes
farmers to significant risks as farm booms mature.
Farmers are "terrified" of high costs if crop prices ease back, says
Michael Swanson, an agricultural economist at Wells Fargo & Co. in
Minneapolis. Such fears could make them reluctant to expand production
as much as they might do otherwise. That would mean more constraints
on food supplies -- and even higher prices.
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