No need to panic over food price increases, says Rabobank

Jessica Lim, Straits Times 10 May 08;

A LEADING player in agribusiness financing tried yesterday to ease fears over soaring producer prices, declaring that 'it's not a food Armageddon'.

Rabobank International said rising prices for agricultural products were an expected part of the commodities market, and costs would moderate.

Indeed, some already have.

'We are in a normal commodity business cycle...We are already seeing a weakening of some prices,' Mr Thomas Lee Bauer, Rabobank's regional head of food and agribusiness research, said yesterday.

'Food prices have been peaking, but it is not a food Armageddon.'

Prices of commodities like soya beans have dipped by about US$30 per bushel, or about 3 per cent, said local importers.

'Prices are still very high, but at least they are constant. I doubt they will go up much further,' said importer Thomas Pek.

Such modest falls, however, are set against world food prices that have surged by about 45 per cent in the past 10 months.

Rabobank cited four reasons for the sharp increase:

Supply shocks like natural disasters and competition for land have shrunk global stockpiles. Rabobank reports that wheat stocks have fallen by about 26 per cent from the end of 2004 to the end of last year, while soya bean stocks have plunged by about 86 per cent from the end of 2005 to now.

Demand has soared, with people in China and other fast-developing countries consuming more meat, igniting demand for grain for livestock.

Speculation by traders has also played a part in raising prices, with huge amounts of capital pouring into commodity markets looking for alternative investments in the wake of the Unites States sub-prime crisis.

The policies of some governments have also also not helped. Short-

term moves, such as export restrictions and levies, imposed in response to strong local demand and tight supply, have worsened price volatility and market distortions. Vietnam and India, for example, have restricted rice exports.

Rabobank noted, however, that Singapore had been largely insulated from the global price increases.

It pointed out that 'commodities are traded primarily in US dollars, and the Singapore dollar has appreciated steadily against the greenback over the past two years'.

Consumers would have to wait for at least three months - the length of the trade cycle - to see the benefit once prices start to fall, Mr Bauer said.

Some industry players are not holding their breath.

Mr Png Geo Lian, the chairman of the Association of Chinese Wheat Flour Merchants of Singapore, said: 'We heard that flour prices have fallen, but our suppliers have not informed us of any changes in prices yet. It will not be that fast.'

Food price spike is normal in cycle: Rabobank
Conrad Tan, Business Times 10 May 08;

THE recent spike in food prices is part of a 'normal' business cycle in commodities rather than a sign of an impending crisis, said a research head at major food and agricultural business lender Rabobank yesterday.

Thomas Bauer, regional head of food and agribusiness research and advisory in Asia at Rabobank, said that food prices 'will start to cool' as economic growth in the region slows in response to a US downturn. But food prices are likely to stay volatile, and will continue to rise in the long term due to strong demand from emerging economies such as China and India, he added.

In a separate interview earlier this week, two commodities business heads at UBS said that there is in fact no worldwide shortage of rice, but that local supply disruptions and shortages have caused the sharp price increases of rice in some countries.

'I don't think we're in a food Armageddon. I think we're in a normal commodity business cycle,' said Mr Bauer yesterday. 'This has happened before.'

He added: 'Generally, we think that if the economy starts to slow in the US, that may trickle to Asia and may provide for some kind of weakening in prices.'

Food production is also likely to increase in response to the much higher prices, he said. 'Never underestimate the ability of the farmer to produce, given the right access to the market.'

Food prices have been driven up by a combination of supply shocks, a surge in demand driven by the rapid growth of economies such as China and India, investors speculating on commodity futures markets and government policies, he said. Speculative traders - a lot of them new to the commodity futures markets - will cause 'an enormous amount of volatility' in food prices in the near future, he said.

But unlike commodities such as cocoa or wheat, the recent jump in rice prices cannot be blamed on speculative trading, said Stuart Fox, head of commodities in Asia at UBS, earlier this week.

The reason: There is no global, liquid market for rice that can be used for purely speculative trading.

'We can't trade rice,' said Simon Games-Thomas, UBS's global head of agricultural commodities. 'There's only physical trading in rice.'

While local rice-trading companies in some countries might be hoarding rice, the speculators, if any, 'are definitely not hedge funds, asset managers, or investment banks', said Mr Fox.

In fact, the lack of such a global market for rice means that it is difficult to dispel fears that the world is facing a shortage, he said. 'With rice and some of the other less liquid commodities, there's a lot of talk, but because there's not a liquid market, it's hard to verify.'

In fact, 'one of the best developments, potentially, for rice would be a global market', said Mr Fox.

Such a market, similar to those that exist for other commodities such as coal, oil or corn, would establish a credible global benchmark price that would be less severely affected by supply disruptions in any one country.

Currently, 'it's unknown what the global price of rice should be, so you end up with very localised rice prices', said Mr Fox. If there are rumours of a shortage in any one country and people there start hoarding rice, the local price of rice jumps abruptly, which then feeds the rumour and sparks more panic-buying. Speculators would attempt to profit from any such jump in the price, cushioning the impact of such rumours.