Speculators exacerbate rising food prices: FAO

Investors add spice to rising food prices
FAO cites growing appetite of index funds, speculators for worsening spike
Arthur Sim, Business Times 6 Jan 10;

(SINGAPORE) Global food prices are rising again with the United Nations Food and Agriculture Organisation (FAO) food price index hitting 168 points in November, the fourth consecutive month of increase and the highest since September 2008.

While this is still about 21 per cent lower than the most recent peak in June 2008 when the index hit 213.5 points, FAO does note that the index has never exceeded 120 points prior to the price spike between 2007/2008.

Several reasons have been highlighted for the rising prices. However, FAO has possibly for the first time highlighted the 'growing appetite by speculators and index funds for a wider commodity portfolio investments on the back of enormous global excess liquidity', as exacerbating the situation.

This mirrors the view of World Bank president Robert Zoellick who said recently that with so much liquidity in global markets, 'you could see additional moves towards the agricultural commodities sector if there were perceptions of market shortages'.

Speculation in agricultural commodities may not have reached fever pitch yet but with food shortages expected in 2010, it could.

Jim Rogers, one of the world's most astute investors has been bullish on commodities in general for several years. On agricultural (or soft) commodities, he says: 'Food inventories worldwide are at the lowest in decades as the world continues to consume more than it produces. We even have a shortage of farmers now since agriculture has been such a terrible business for three decades. We should all hope prices go higher or there may soon be a time when there will be little or no food at any price.'

Mr Rogers, who created his own commodities indices, has put his name to several index funds. The Elements Jim Rogers International Commodity Index Agriculture Total Return which is listed on the New York Stock Exchange has, for instance, risen by about 6 per cent since the start of 2009.

Interest in soft commodities has had an impact on prices.

'Whenever there are buyers of anything, it affects the prices. For example, if you live in an apartment or house, you are affecting the price of housing in Singapore,' adds Mr Rogers.

There are several ways to invest in soft commodities including the futures contracts on commodities exchanges like the Chicago Board of Trade (CBOT).

The index funds alluded to by the FAO include the more rarefied market of exchange traded funds (ETFs) that typically attract institutional investors.

There are more prosaic ways as well.

In China, the bubble people are talking about now is not in real estate but in garlic.

Worries about persistent swine flu prompted a spike in garlic consumption in 2009 and soon, everyone was hoarding it in hopes of making a quick buck. Prices are said to have gone up by 50 per cent in the last few months.

Rice could be next. Barclays Capital Research economist Leong Wai Ho says: 'The bigger problem for food prices is an old one - physical hoarding that can limit physical availability, unlike derivative trading.

'Rice prices are now at levels that are likely to induce physical hoarding in Vietnam and Thailand. And also in stricken countries - authorities in Southern Guangdong have introduced anti-hoarding measures in the wake of the ongoing drought.'

And Mr Leong also believes the significance of food prices may not have been factored into inflation either.

For 2010, the Singapore government's inflation forecast has been revised from 1-2 per cent to 2.5-3.5 per cent. Citing rising Thai fragrant rice prices, the prospect of El Niño weather conditions, higher import demand from Asian countries, Barclays' 2010 inflation forecast for Singapore is higher at 4 per cent, up from 1.5 per cent previously.

Still, the verdict is out on how this will impact the economic recovery.

'I don't think there will be a meaningful impact on growth,' says Mr Leong. 'While the monetary policy stance will be tightened from where it was before, the overall policy stance will still be largely accommodative in 2010. The exchange rate will be used to lean into imported inflation, while liquidity will still remain flush and fiscal policy still expansionary,' he added.

Economists will nevertheless be 'keeping an eye' on food prices.

CIMB-GK regional economist Song Seng Wun said: 'A combination of both fundamental factors and speculation may drive prices higher - just as we saw in the energy market which drove crude oil prices to US$150 per barrel. But of course the speculation in energy market is much bigger because there are lots more energy desks in many banks.'