Increasing agricultural commodity prices (due largely to unfavorable weather like the ongoing U.S. drought) are causing the world to re-enter a period of "agflation," with food prices forecast to reach record highs and continue to rise well into the third quarter of 2013, according to a recent Rabobank report. In addition, said Rabobank, unlike the staple grain shortage of 2008, 2012's scarcity will affect feed-intensive crops with serious repercussions for the animal protein and dairy industries.

The report estimates that the Food and Agricultural Organization Food Price Index will rise by 15 percent by the end of June 2013. In order for demand rationing to take place, in turn encouraging a supply response, prices will need to stay high. Rabobank said it expects prices — particularly for grains and oilseeds — to remain at elevated levels for at least the next 12 months.

“The impact on the poorest consumers should be reduced this time around, as purchasers are able to switch consumption from animal protein back towards staple grains like rice and wheat," said Luke Chandler, global head of agri commodity markets research at Rabobank. "These commodities are currently 30 percent cheaper than their 2008 peaks. Nonetheless, price rises are likely to stall the long-term trend towards higher protein diets in Asia, the Middle East and North Africa. In developed economies — especially the U.S. and Europe — where meat and corn price elasticity is low, the knock-on effect of high grain prices will be felt for some time to come.”


While the impact of higher food prices should be reduced by favorable macroeconomic fundamentals (low growth, lower oil prices, weak consumer confidence and a depreciated U.S. dollar), interventionist government policies could exacerbate the issue, said the report. Stockpiling and export bans are a distinct possibility in 2012–2013 as governments seek to protect domestic consumers from increasing food prices. Increased government intervention will likely encourage further increases in world commodity and food prices. Rabobank said it expects that localized efforts to increase stockpiles will prove counterproductive at the global level, with those countries least able to pay higher prices likely to see greater moves in domestic food price inflation. This is a vicious circle, with governments committing to domestic stockpiling and other interventionist measures earlier than usual — recognizing the risk of being left out as exportable stocks decline further.

On top of that, global food stocks have not been replenished since 2008, leaving the market without any buffer to adverse growing conditions. Efforts by governments to rebuild stocks could add to food prices and take supplies off the market at a time when they are most needed.