Food Prices And Chemicals



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Graph prepared by the http://www.thegatesnotes.com/Personal/2012-Annual-Letter

 

By John Richardson

RISING food prices resulting from adverse weather conditions in the US, South America and Russia represent yet another threat to global economic growth.

Grain prices could, for instance, increase by as much as 25 percent this year, warns Danske Bank.

Dry weather in the US has hit corn and soybean crops, and the drought has been particularly bad in the mid-west corn belt.

La Nina has reduced South American harvests.

Simultaneously, dry weather in the Black Sea region has raised fears of a repeat of the 2010 wildfires that destroyed large parts of the Russian wheat crop.

The good news is that wheat and rice harvests in China look set to be good.

But a problem, of course, is that agricultural commodity prices are set globally.

Extreme volatility in food prices, driven to some extent by speculators in futures market, will also remain a permanent feature of the global economy.

The speculators are also to blame for the dysfunctional nature of crude-oil markets.

For the chemicals industry food represents an opportunity, as well as a threat, as we outline in our e-book, Boom Gloom & The New Normal.

The industry has the opportunity to apply existing products, and to develop new products, which can meet the challenge of providing enough food to sustain healthy global growth – one of the four megatrends.

The threat comes from, as we have described, the damage to growth caused by sudden increases in the cost of food, particularly in developing countries, as the chart above illustrates.

The vast majority of people in developing countries are very poor by Western standards and so spend a big proportion of their incomes on food.

Every time food prices increase, this damages chemicals demand growth. The reason is that millions of low-income earners are forced to reduce their spending on the basic consumer goods that they can just about afford to buy in the best of economic times.

This year’s surge in the cost of food further illustrates that we live in a VUCA world in which investment in innovation is crucial for chemicals companies. They can thus help dictate their own patterns of demand.

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