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ANALYSIS: Food price inflation takes a firmer grip, especially in edible oils

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The UN’s Food and Agriculture Organization’s (FAO) latest food price index says that world food prices rose in March, for the 10th successive month, reaching an average 118.5 points, against a (revised) 116.1 in February.

 

Its cereal index fell by 1.7% in March compared to February but was still 26.5% higher than in February. Strong demand for feed barley and wheat is expected in China during 2020-21, helping global cereal utilisation rise to 2.777bn tonnes, 2.4% higher year-on-year, says the FAO.

 

But perhaps the most significant rise was in the FAO’s vegetable oil price index (including palm, soy, rape and sunflower oils), which surged 8% month-on-month and reached its highest level since June 2011 - a rise of 86% in the past year.

 

Jokers in the pack

 

Are edible oils’ prices headed further north or set to dive south?

 

On the one hand US President Joe Biden’s promised "clean energy revolution" will need a transition period for road transport fuel, in which biofuels will become more important as a step towards full electrification of America’s 279m petrol-powered vehicles.

 

This "revolution" will take years; in the interim it’s bound to push up edible oil demand. According to BMO Capital Markets US soyoil demand could outstrip US production by almost 4m tonnes if just half of the currently planned new biodiesel capacity is built.

 

One leading edible oil analyst said at the end of March: "People are as bullish as hell that green energy will take over."

 

On the other hand uncertainties remain about demand from key importers, such as India, the world’s biggest importer of edible oils; India imports around 17m tonnes of edible oil a year. High prices can dent demand - India’s imports of edible oils fell by around 27% in February year-on-year - as prices surged for some oils, such as sunflower.

 

China is another major importer of oilseeds, taking 100m tonnes of soybeans last year (mostly to be crushed for animal feed). What it may import this year is very uncertain; fresh outbreaks of African swine fever (ASF) may lower its animal feed needs, although herd re-stocking (which largely explained last year’s massive soybean imports) will need to be done at some point.

 

Industry opposition

 

US farmers are heavily involved in the country’s biofuels sector - almost 40% of its corn is consumed by ethanol production (subsequently blended into petroleum) and 30% of its soybeans go into biodiesel.

 

A nationwide shift to all-electric vehicles as envisaged by Mr Biden, albeit slow, "would absolutely destroy (the state of Iowa’s) economy because it’s so dependent on agriculture and agriculture is so dependent on biofuels" according to Senator Charles Grassley of Iowa.

 

In the past year the front-month contract in the US for soybeans has gained some 67%, and that for corn almost 78%. This is a remarkable bull run which has owed everything to strong demand, almost nothing to supply-side problems, apart from some drought in Argentina and slow Brazilian harvests.

 

The price trajectory for the rest of this year will hinge on what happens in China and how far US farmers can step up to the plate - which we may be able to better gauge from the next Wasde, due on April 9.

 

But thinking more long-term, out to next year and beyond, the various demands from both the US and its clean energy moves, and Asia’s growing middle class, will combine to underpin higher prices.

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