This little piggy went to market – and fetched a very good price. And so did little lamb and baby bullock. If you have livestock to sell, you are doing well and if you like eating steak and ribs, prepare to pay more. Montrealers are bracing themselves for a sharp increase in the cost of their favorite snack. Schwartz's delicatessen is slapping an extra dollar on the price of a smoked meat sandwich and the blame is being squarely laid on Albertan cattle farmers.
You can see the rampaging bulls at work in the livestock futures markets on the Chicago Mercantile Exchange where hogs and cattle are hot properties. In March, contracts for live cattle reached an all-time high at $1.47 (U.S.) per pound, up almost a quarter over the past year. Since the post-crash slump of 2009, the price of beef cattle has risen by more than 70 per cent on the U.S. futures exchange, and pork has been a good bet as well. The hog futures contract has also reached a record, peaking at $1.33, up by almost 50 per cent since the beginning of this year.
Years of drought in the western states have left America with a lean cattle herd, the smallest since the 1950s and the hog population has been badly affected by disease, the unpleasant-sounding porcine epidemic diarrhea virus which kills piglets. It takes time to rebuild a herd but there are signals that suggest we may be moving into a long-term rise in the cost of food after decades of abundance and low prices.
These trends are evident in statistics tracked by the Food and Agricultural Organisation, a UN agency, which show a very sharp pick-up over the last decade in its Food Price Index, which monitors, cereals, oils, dairy, sugar and meat. The index, which takes its base line at 100 for average food prices in 2002-2004, surged by 40 points to 201 in 2008 and then subsided to 160. It experienced another surge to 230 in 2011 before subsiding, and the index appears to have started 2014 with a sharp rebound. It reflects huge price volatility in response to weather events and surges in demand from new consuming regions in East Asia. Even more interesting, is the real (adjusted for inflation) version of the index, which shows highish food prices (an index of 125-150) in the 1960s, a surge in the index above 150 during Arab OPEC oil embargoes in th early 1970s and then a long decline. Between 1985 and 2004, the food price index is almost flat, hovering just above 100, reflecting the huge output and efficiency gains of the green revolution and mechanized farming.
What happened in the early years of the 21st century was the intrusion of Chinese demand on global commodity markets. The dramatic impact on the crude oil and base metals markets is well documented, but there has also been a huge boost in demand for animal feed and dairy products. In order to feed the new affluence, China is expected to import record amounts of corn this year, some 2.5 million tonnes, to make up for the domestic shortfall. It is already the world's biggest buyer of soybeans, importing two thirds of the traded soya market. We can also see the impact of this year's demand signal on grain markets, with a 20 per cent surge in the corn price since the beginning of January.
Agricultural commodity markets have adjusted quickly, notably in Australia, to cater to their new customers' appetite for meat and milk. However, what we have not experienced is the strong improvement in farm yields which occurred in the three decades to the end of the last century. Instead, we have had wild weather events, worsening droughts in Australia and the U.S. and corresponding price surges.
Politicians have responded to climbing food prices with anti-market rhetoric, threats of regulation and, in the case of some emerging market producers, export bans. None of this will change the long-term supply-demand balance and it is interesting to see that those with their ears close to the soil are investing in the business of connecting producers to consumers. Glencore Xstrata PLC bought Canada's Viterra Inc. for $6.1-billion in 2012, the Japanese trading house Marubeni Corp. spent a similar sum buying U.S. grain trader Gavilon Holdings LLC last year, and China's state grain importer, COFCO, recently agreed to buy the agri-business arm of Noble Group, the Singaporean company. Meanwhile Louis Dreyfus Group, one of the four leading agricultural trading combines alongside Archer Daniels Midland Company, Bunge Limited and Cargill Inc., is dressing its agricultural commodities arm up for some form of corporate restructuring. According to the Financial Times, the French firm may be preparing itself for an IPO.
In all likelihood, Dreyfus can see that the agricultural markets are in turmoil and that its rivals are investing heavily. A firm that wants to remain in the top tier needs to invest, and that means access to capital. China is scouring the world for sources of food. For those with agricultural assets, it is a seller's market – and the runes suggest it may remain one for some time to come.