Grain price rises and related risks

2020-09-09 14:16 Minggao Shen

AnnexGrain price rises and related risks [republished]-2020-09-07.pdf

Global grain prices on the rise

Since the 1960s, global grain prices have experienced six periods with notable increases, each driven by changes in supply and demand and international financial conditions. Since the World Bank’s grain price index peaked at the end of 2012, prices have declined for nearly eight years. Grain prices have now bottomed out, and factors driving up prices outweigh stabilizing factors, meaning a continued rise in prices is likely.

Key stabilizing factors

There has been a significant rise in global grain supply and demand over the past six decades amid technological advances and population expansion. Meanwhile, progress in energy technologies such as biofuel production has become a new source of growth in demand for grains.

Constrained by the tight balance between supply and demand and an imbalance in production and sales across regions, there has been a rise in demand for international and intertemporal allocation of grain. The rapid development of the international grain market has facilitated grain allocation across regions and helped reduce fluctuations in grain prices.

Moreover, historically high grain inventory levels should offset the impact of unexpected declines in grain supply on global grain prices.

Also, the global grain price cycle has been correlated with the global economic cycle. Historically, a spike in grain prices has rarely been seen during economic downturns or recessions.

Increasing uncertainties for grain prices

Extreme weather events are a major risk factor for international grain supply. Amid global warming, there have been more frequent and more destructive extreme weather events, posing new challenges for grain production that may exacerbate the imbalance in grain supply and demand across regions. Upside risks in international grain prices should prevail in a market dominated by producers over the long run.

In addition, global grain prices could rise on stronger inflation expectations as superabundant liquidity around the globe could make asset prices frothier. Currently, the global gold-oil price ratio is far above its long-term average, and the gold-grain price ratio is reaching historical highs, meaning oil and grain are relatively undervalued. Amid higher expectations of future inflation boosted by extremely accommodative financial conditions, the spillover of capital and speculative demand could mean a new round of grain price increases is more likely.

Against the backdrop of rising imbalances in global food supply and demand across regions, the decoupling between China and the US could disrupt international grain trade patterns. As China's grain trade deficit with the US has expanded in recent years, if their decoupling affects the grain sector, a consequent decrease in grain supply could lead to higher food prices in China. The structural problems caused by food inflation and non-food deflation could then give rise to stagflation risks in China.

Grain price hikes may depress risk asset performance

Soaring grain prices usually prompt inflation expectations and concerns about policy tightening. Given the current monetary policy stance around the globe, inflation, including food prices, may prevent countries from launching extremely accommodative monetary policies and force them to face up to their structural problems.

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