Global Economy
Commodities Supercycle: Real food prices in 1980 - 2000 were as low as 1930s - Part 2
By Michael Hennigan, Finfacts founder and editor
Jan 7, 2015 - 1:26 AM

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Commodities Supercycle: The IMF said in 2011 that the world grew accustomed to relatively low international food prices in the 1980s and the 1990s, when prices adjusted for inflation were below those recorded during the Great Depression.

McKinsey said in an analysis in 2013 that demand for food increased throughout the 20th century, but thanks to higher yields, prices fell (in real terms). "Yet they have risen by almost 120 percent since 2000 as yield improvements slowed, demand for feed went up, and agriculture endured droughts, floods, and variable temperatures. The net result is that global buffer stocks are running low but demand for food, largely in Asia and Africa, is expected to go up by 35 percent during the next 20 years. In addition, higher production of biofuels is boosting demand for land. So is the fact that more than 20 percent of the world’s arable land has been seriously degraded through, for example, pollution and soil salinization. Finally, the land shortage is further exacerbated by the mass migration of people from rural areas to cities: urban sprawl could reduce the world’s cropland by two million hectares a year."

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McKinsey had previously reported that in India, it's expected that calorie intake per person will rise by 20% during that period, while per capita meat consumption in China could increase by 60%, to 80 kilograms (176 pounds) a year. Demand for urban infrastructure also will soar.

"China, for example, could annually add floor space totaling 2.5 times the entire residential and commercial square footage of the city of Chicago, while India could add floor space equal to another Chicago every year.

The Financial Times reported in 2013 that the world’s top 20 physical commodities trading houses in 2012r made $33.5bn in net income, little different from net income levels over the past five years and an estimated $250bn in a decade.

Latin America is as dependent on commodities today as it was 40 years ago, the IMF said in 2011. However, demand from  has been a godsend for the region.

The Economist wrote last month: "Since the late 1970s, when the government liberalised agriculture, pork consumption has increased nearly sevenfold in China. It now produces and consumes almost 500m swine a year, half of all the pigs in the world. The tale of Chinese pigs is thus a parable of the country’s breakneck economic rise. But it is more than symbolic: China’s lust for pork has serious consequences for the country’s economy and environment—and for the world."

Each kilogram of pork requires 6kg of feed, usually processed soy or corn and because of the scarcity of water and land in China, it has increasingly rely on imported feed.

More than half of the world’s feed crops will soon be eaten by Chinese pigs. Already in 2010 China’s soy imports accounted for more than 50% of the total global soy market. "From a low base, grain imports are rising fast as well: the US Grains Council, a trade body, predicts that by 2022 China will need to import 19m-32m tonnes of corn. That equates to between a fifth and a third of the world’s entire trade in corn today."

David S. Jacks, an economics professor at Simon Fraser University in British Columbia who has analyzed more than 160 years of prices for 30 commodities, says he has found a modest, 2% annualized price increase since 1950, adjusted for inflation. But he discerns supercycles within this trend. After roughly 15 years of generally upward movement, he believes that we have entered a phase of declining prices.

After the Asian currency crisis of the late 1990s, the explosive growth of resource-hungry emerging economies like China’s helped set off a multiyear commodities price boom. And Prof Jacks says today’s slowdown in China, and signs of weakness in the global economy, have contributed to the current decline.

Jacks has found tight correlations among nearly all “hard” commodities - “those that are extracted from the ground, rather than grown on it.” Part of this may be because of the “financialization” of commodities  - their inclusion in indexes and exchange-traded funds that let traders place bets by pressing a button. Agricultural commodities like wheat that are included in broad indexes like the S&P GSCI (formerly the Goldman Sachs Commodity Index) have come to share in these price movements, he says.

Commodities price supercycle ends after century of price falls - Part 1


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