October 25, 2007

 

Dwindling grain stocks could triple Australia's meat, milk prices

 

 

Prices of milk, bread and meat in Australia could triple in the next five years due to diminishing world grain stocks and greater demand from producers of ethanol and other biofuels, a grain company executive said.

 

Imre Mencshelyi, Chief Executive of Perth-based Cooperative Bulk Handling Ltd., said farm products prices are "pulling out of a long-term decline and could "rocket" in the coming 12 months and in subsequent years."

 

Though high prices of food are welcome news for farmers, it is shunned by processed food makers as it jacks up input prices and for retailers, who want to cap prices to keep consumers buying. They also pose a problem for central banks since monetary policy targets broader price increases.

 

Underlying inflation, which is central to policy making at the Reserve Bank of Australia (RBA), was running at an on-year pace of 3 percent in the third quarter, at the top of the RBA's 2 percent to 3 percent target band and up from 2.8 percent in the second quarter.

 

The headline consumer price index rose a more benign 1.9 percent from a year earlier. Big contributions to the consumer price index in the third quarter came from higher food and housing costs.

 

Mencshelyi projects the retail price of a litre of milk could reach A$5 within several years from the current A$1.80.

 

The number of farmers in Australia has dropped in recent years because lower prices of previous years made farming unprofitable in Australia, as elsewhere.

 

Cooperative Bulk Handling is a grain logistics and marketing concern and owns six flour mills in Indonesia, Malaysia and Vietnam through Interflour Group, a joint venture with Indonesia's Salim Group, a global noodle maker and flour miller.

 

Mencshelyi's comments echo similar remarks from Les Wozniczka, chief execuive of farm services concern Futuris Corp. (FCL.AU) who also forecast soaring food prices due to an increase in the cost of key farm inputs such as fuel, energy, fertiliser, labour and borrowing rates.

 

Wozniczka said there would be some serious inflation in the cost of living globally as "pricing power will start to return to farmers".

 

Australian food prices rose 1.9 percent in the third quarter, with fruit prices up 10 percent and vegetables up 7.9 percent, according to data issued Wednesday (October 24) by the government's Bureau of Statistics.

 

Craig James, chief equities economist at Commonwealth Securities Ltd. said the cost of food is rising sharply across the globe, with a Commodities Research Bureau foodstuffs index up 21 percent in the past year.

 

James said food prices have soared by 90 percent, the highest registered increase in around 35 years.

 

Many factors are pushing food prices higher, including rising incomes particularly in Asia, changing diets, adverse weather and increased biofuel production which is absorbing more crops.

 

Supply will eventually respond to the increased global demand for food, but prices of grain-based products and meat "will remain elevated for at least the next year," he said.

 

That said, the vagaries of climate change, as well as the demand exerted by biofuels on crops "suggest that food prices could be higher for longer - just like metal prices," he said.