September 28, 2012

South Korea's inflation up 0.33% due to global grain price hike

Due to a strong correlation between global crop prices and local inflation, global grain price hike will raise South Korea's headline inflation by 0.33% following the Chuseok holiday.

According to the Hyundai Research Institute (HRI), the hike in global crop prices that started in mid-June will begin to put upward pressure on the country's headline inflation after the Chuseok holiday that falls on this weekend in 2012.

It will lead to a 0.33 percentage point rise in the domestic consumer price inflation, said the think tank.

Rally in imported wheat prices would raise local flour prices, leading to price hikes for cookie, bread and noodle, according to the think tank. Corn price hike would push up feed costs for animals, resulting in higher livestock prices. Higher soy prices would lift prices for feed costs as well as consumer goods such as bean curd and vegetable oil.

Global corn and soy prices have rallied to records since mid-June, with wheat heading toward its high. Corn futures traded at US$8.31 a bushel on August 21, above the previous record of US$7.87. Soy futures surged to US$17.36 a bushel on September 14, breaching the prior high of US$16.58, while wheat futures were quoted at US$8.97 a bushel on the same day, heading toward the record high of US$12.82.

Global grain prices and local consumer price inflation showed a strong correlation with a time lag of 3-4 months, according to the HRI. Three months after the international grain price index surged 74.1% in April 2008 from a year earlier, South Korea's consumer price inflation accelerated to 5.9%. The 54.2% hike in crop prices in April 2011 led the country's headline inflation to rise to 4.7% with a four-month time lag.

The think tank said extreme weather was the main culprit for grain price hikes. The US, which accounts for 35-70% of global grain exports, suffered from the worst drought in 56 years during the summer season.

Speculative investors were also blamed for short-term volatility in grain prices. Liquidity injection by major central banks encouraged speculators to invest into the international commodity market for non-commercial purpose.

From the long-term perspective, grain prices will be pressured upwardly due to fast-growing population globally as well as rising demand for animal feed and biofuel, said the HRI.

The think tank noted that South Korea, which heavily depends on imports for grain consumption, should closely monitor the possible price rigging and sufficiently supply grain reserves, saying that the authorities should set up a warning system and policy manual in preparation for future grain price hikes.