Rising commodity prices have further to go

FOR two weeks our headlines and television sets have been dominated by Egypt. Prior to the scenes in Tahrir Square, all eyes were on Tunisia; contagion is spreading across the Middle East. So what role did rising food costs play in pushing the region to the brink? And how can citizens be expected to understand the “commodity supercycle”?

Onions, a staple in Indian cooking, are now unaffordable for the country’s poor, with food inflation at 17.5 per cent. In China, the number is also in double digits. According to Capital Economics, a monthly grocery bill of $600 for a family of four in Canada is set to climb to $630 in 2011.

That’s a rise from two to five per cent food inflation. But in developed countries, these shifts are rarely reflected in monetary policy, in part because food is a small part of overall baskets or because the narrower measures used exclude food. Yet last week, the United Nations’ Food and Agriculture Organisation reported that its food price index is at its highest in 21 years. The jump in oil prices only adds to the pressure felt by consumers that have seen global asset prices surge since mid-2010. To critics, it’s a sign that the US Federal Reserve’s monetary easing is sending inflationary shock waves across the globe.

Needless to say, Fed chairman Ben Bernanke disagrees: he called it “entirely unfair” to blame the Fed’s loose monetary policy or QE2 for rising food prices. He said booming emerging economies, and the richer diets that go with rising prosperity, have driven the price hikes.

So what is the truth, and what else could be going on? Goldman Sachs expects “cyclical commodities to enter a bull market, augmenting the bull market in agricultural commodities that began in 2010”. It is long on corn and soybean, and believes that as the global economy continues to gather steam these are just some of the commodities where limited supply will see prices rally. Wholesale sugar prices last week hit a 30-year record. Wheat is up 77 per cent in the past year and increases have been seen in soybean, oats and rice. But prices are still far below their 2008 record and there’s plenty of room to go higher.

It’s not just the kinds of commodities that China and India want which are going up in price. Crucially, Goldman argues that QE2 will drive US growth and that a bidding war will ensue between developed and developing worlds when it comes to who wants to eat the richer diet. So take that, Bernanke.

Countries will continue to stockpile food to avoid the scenes of unrest like those in Tahrir Square. Traders continue to bank on rising prices. The global consumer may be left with no choice now but to hope that western monetary policy somehow re-aligns to reflect a world that is more intricately connected than ever before.

Maithreyi Seetharaman is a CNBC anchor