Soft commodities

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Worried about inflation?


The weather channel didn’t exist in 1971. If it had, Richard Nixon might have paid close attention to the characteristic thermal swirls of El Niño. Then, as it can do now, the “Southern Oscillation” led to poor crop harvests worldwide, higher food prices, and rising inflation. That August – two years before the oil price spike that is credited with causing the 1970’s high inflation – Nixon imposed wage and price controls. Four decades later, it is possible that food could cause another price shock. For any investor who is knee-deep in government bonds and worried about inflation, the price of wheat, rice and other soft commodities is one place to look.

CommoditiesOstensibly, there is little to fear. Like other commodities, “softs” have been hit by the financial crisis, with prices down by a quarter since their peak last July. Yet this is peanuts compared to other commodities, such as oil, that have dropped by three quarters. It also sets a high base from which prices could rise again.

There are some signs that this is happening already. Consumers in the developing world are cutting back on meat to buy cheaper staples. But at the same time farmers, hit by recent price falls and scarcity of credit, are reducing plantings. The Philippines has cut its estimate of rice production this year by 4 per cent. In the US, winter wheat plantings have fallen by 9 per cent; in Europe, by 3 per cent. Lower production would matter less if world food stocks were plentiful. Yet they remain near the depressed levels of the 1970s. Bad weather or crop disease could easily cause prices to spike. That is what happened to cocoa, up by more than 72 per cent since the start of last year.

Food price inflation would be a headache for policymakers. Food accounts for a sixth of the US consumer price index, one and a half times more than energy. And while consumers can drive less or turn down the thermostat, they must eat. Potentially, this is where the financial crisis meets the Malthusian world of Al Gore.

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