By BILL BLEVINS [email protected]
Bill Blevins is the Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.
The ban on Russian wheat exports has pushed the spotlight back onto world food prices.
Specialists comment that an ensuing wheat shortage and price hike should be temporary, but this is an example of how volatile food prices can be and it focuses the mind on the future price of food and the effect this will have on inflation. Is your wealth shielded from long-term inflation?
After the worst drought for 130 years and the following wildfires which destroyed one-fifth of the farmland, Russia, the world’s third largest wheat exporter, banned exports on wheat, corn, barley, rye and grain products from August 15 until the end of the year to protect the domestic market.
The government later gave notice that the ban could stretch into next year. Lack of rain could prevent planting for the 2011/ 12 season, restricting production for at least two years.
Ukraine, the world’s sixth largest exporter of wheat and largest exporter of barley, is also suffering from the effects of severe drought and was considering a cap on wheat and barley exports.
It has postponed the decision “indefinitely” but quotas may be considered in future. If Ukraine did impose such a cap, it will only add to the pressure on prices. Basic foodstuffs like bread, biscuits, flour as well as beer will be further affected.
The possibility of Russia’s wheat embargo pushed the price up to its highest level in two years and sparked warnings of a wider contagion across global grain markets.
Climate change is one of the main reasons for crop failure and if severe weather conditions like drought and flooding continue, growing cereals in related agriculture producing countries will be further threatened.
There have already been adverse weather conditions for grains in Canada and the Middle East. This will have a knock-on effect of increasing meat prices because animal feed will cost more.
The growing middle class in developing countries is eating more meat, as well as processed foods (which generally contain more vegetable oils and proteins), putting pressure on the demand for animal feed.
For example, an average Chinese person ate 20kg of meat a year 25 years ago. Today it is closer to 50kg. There is evidence of increases in the US meat market and experts forecast more shortages and price rises to come.
The United Nations’ Food and Agriculture Organisation has said that global prices will rise faster than expected this year at three per cent.
Analysts from Commerzbank warned that “the price increase of grain will primarily lead to a price increase of meat products, because animal feed accounts for more than 60 per cent of total costs regarding meat. Meat prices have already risen this year, even before agricultural products, such as wheat or soya beans, increased in price. Another increase of meat prices might be imminent, if agriculturals ‘infect’ one another, similar to the years 2006 to 2008, and the strong price increases of wheat lead to rising prices of soya beans and corn, both of which are primarily used for the production of animal feed.”
Currently, there are 6.8 billion people in the world to feed. The United Nations (UN) says that this will increase to more than nine billion by 2050.
The UN’s Food and Agriculture Organisation (FAO) and the Organisation for Economic Co-operation and Development (OECD) forecast in a joint report that total world demand for agricultural products will leap by 70 per cent before 2050.
They also predict a decade of higher prices. Wheat and grain prices are expected to be 15 to 40 per cent higher and vegetable oil will cost more than 40 per cent more.
A larger world population also potentially reduces the availability of water and the area of land on which to farm, particularly in Asia, the world’s largest food supplier.
Along with the Middle East, these areas are expected to see the biggest increases in population.
Floods in Pakistan have also destroyed cotton crops. China, the world’s largest consumer and producer of cotton may have to step up its quota of imports if it experiences a shortage.
Fashion retailer Next has said that clothing prices may rise by up to 8 per cent next year due to the impending scarcity of cotton.
The US Department of Agriculture predicts that trade in cotton will increase 22 per cent by 2019.
There is also the added pressure for agricultural products to be used as biofuels to power vehicles in a move to combat climate change.
The demand for crops to be planted for use as biofuels will grow during the next decade, according to the USDA. The EU is insisting that biofuels account for 10 per cent of the transportation sector’s energy use by 2020.
Inflation eats away at your wealth over the years, leaving you with a lot less spending power in the future than you may currently expect.
Food prices are already putting a strain on the cost of living. The demand for wheat and associate foodstuffs will increase as shortages become more acute and the demand from a growing world population intensifies.
If you are concerned about inflation reducing your wealth in the long-term, ask an experienced wealth manager like Blevins Franks for advice on investments to keep pace with inflation and which are suited to your personal circumstances. For example, as part of your portfolio, you can invest in real assets, which include commodities like agriculture, and benefit from the increasing demand as well as rising prices.
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