Some people blame Ben Bernanke for food inflation, even though that doesn’t make much sense. The idea of “hot money” flowing into Indian onions is fairly laughable.
A more plausible explanation is simply that the world’s food supply has just not grown at the same pace as demand. That’s actually worrisome, and it jibes with the high food inflation we saw pre-bust.
But what if there’s another reason that food prices are high today, and also were back in 2007-2008?
It turns out, weather patterns right now are similar to what they were in 2007-2008, especially in the US.
That’s the observation of Nomura’s Sean Darby in his piece on the Soft Commodity Crunch of Asia.
Last week’s USDA report was illuminating in highlighting the ongoing tightness in supply. Dramatically, the USDA cut US corn supply estimates for the year to 31 August for the fourth time since 2010 due to weather disruptions, with inventories already at 15-year lows. Meanwhile for China, US soybean supply forecasts have left projected inventories at precariously low levels. World wheat supplies, on the other hand, are ample, but the markets continue to worry about inventories of high- quality wheat suitable for milling flour. Fortunately, there appears to be little concern over rice. The same is not true for cotton, where the divergence between planting intentions and supply remains wide.
Despite the tightness in supply, investors remain nervous about the degree of speculative interest and concerns abound that prices will be subject to a sharp blow-off. First, La Niña continues to disrupt weather patterns and hamper planting. Second, there appears to be consistent follow-through price moves as higher corn prices lead to higher feed prices, while climbing oil prices are also experiencing a sympathetic appreciation. Last, agriculture equities appear to be moving in tandem with their underlying products, suggesting some degree of rational pricing.