Oil and Food Prices Likely To Remain High and Volatile

Oil and food prices are likely to remain high and volatile as low inventories and capacity margins are expected to persist for some time, the International Monetary Fund says in its latest World Economic Outlook.

Oil production is expected to remain broadly stagnant, as much of the small amount of new capacity coming on stream is likely to be offset by further production declines in existing fields, the IMF says. In food markets, rising biofuels production and continued strong net demand from emerging and developing economies should continue to exert pressure on some prices.

In the oil market, the strong upward momentum in prices has reflected a sluggish supply response against the backdrop of already stretched spare capacity at the start of the global recovery.

There is now widespread realization that production and distribution capacity will be slow to build up, reflecting soaring investment costs, technological, geological, and policy constraints, as well as the rundown of existing fields. This is expected to perpetuate very low spare capacity and tight market conditions.

 

Turning to food commodities, the recent price surges reflect a confluence of factors. Demand growth—partly reflecting the strong growth in emerging and developing economies noted earlier—has generally outstripped supply growth for many food commodities over the past 8–10 years, notably major grains and edible oils. The general upward pressure on prices has been strongly reinforced by a number of developments since 2006:

• Unfavorable weather conditions reduced harvest yields in both 2006 and 2007 in an unusually large number of countries. Wheat harvests, in particular, had been adversely affected, which led to a sharp bidding-up of wheat prices, with spillovers into close substitutes (particularly rice).
• Rising biofuel production in advanced economies has boosted food demand. In particular, rising corn-based ethanol production accounted for about three-fourths of the increase in global corn consumption in 2006–07. This has pushed up not only corn prices but also prices of other food crops and, to a lesser extent, edible oils (through consumption and acreage substitution effects), and poultry and meats (feedstock costs).
• The rise in oil prices and energy prices more generally has boosted production costs for food commodities, through the impact on transportation fuels and fertilizer prices (the latter have more than tripled since early 2006).
• The growing use of export restrictions by food exporters to raise domestic food supplies and lower domestic prices has put pressure on world prices. Export restrictions by some major rice exporters likely contributed substantially to the run-up in rice prices in 2008.

Comments

[John Egan]

Hmm.... Just read an article that stated categorically that wheat in particular has had and is heading in to it's best year yet. It noted that India, Canada, Russia and China are all expected to overproduce this year by considerable margins.... Sorry, not sure where the article is, but it was accompanied by numbers....

Thx jegan ;-)