Asia Food Price Inflation Easing In Coming Quarters

BMI View: We believe the recent acceleration of food inflation in India and Indonesia will prove transitory. Meanwhile, other emerging countries in Asia will maintain benign food price inflation, as rice prices retreat below current levels and grain prices remain relatively low. Therefore, we continue to believe food price inflation in the region will ease in the coming quarters.

After over a year of food price disinflation between August 2011 and August 2012, food consumer price inflation (CPI) in Asia has been slightly reaccelerating since the beginning of 2013, driven by the rally in grains prices in H212 and elevated rice prices. Our view stated in January 2013 that food CPI in Asia would temporarily pick-up due to continued high grains and livestock prices before easing in H213 is playing out ( see 'Temporary Pick Up In Asia Food CPI To Ease In H213' January 24). Indeed, our Emerging Asia Food Consumer Price Index - a simple average of the constituent countries' Food CPI - has risen since December 2012 and would be on a downtrend since March if India and Indonesia were excluded. Food price inflation in these two countries came in surprisingly strong in recent months and boosted the entire index. Meanwhile, the majority of Emerging Asian countries have recorded declining or benign food price inflation.

In Indonesia, rising food inflation reflects the rapid sell-off the rupiah that has taken place over recent weeks, in a country which imports large amounts of foodstuff. The significant hike of fuel prices in June is also pushing up food prices via skyrocketing transport costs ( see 'BI To Retain Tightening Bias As Inflation Quickens', September 5). In India, unprocessed food wholesale price inflation came in at 18.2% y-o-y in August, compared with 9.3% a year ago. Food inflation was fuelled by late planting and disruptions in supplies of staple vegetables and onions due to heavy monsoon rains.

Temporary Pickup
S&P GS Grains Index, Front-Month CBOT Rough Rice & EM Asia Food CPI, % chg y-o-y

Asia Food Price Inflation Easing In Coming Quarters

BMI View: We believe the recent acceleration of food inflation in India and Indonesia will prove transitory. Meanwhile, other emerging countries in Asia will maintain benign food price inflation, as rice prices retreat below current levels and grain prices remain relatively low. Therefore, we continue to believe food price inflation in the region will ease in the coming quarters.

After over a year of food price disinflation between August 2011 and August 2012, food consumer price inflation (CPI) in Asia has been slightly reaccelerating since the beginning of 2013, driven by the rally in grains prices in H212 and elevated rice prices. Our view stated in January 2013 that food CPI in Asia would temporarily pick-up due to continued high grains and livestock prices before easing in H213 is playing out ( see 'Temporary Pick Up In Asia Food CPI To Ease In H213' January 24). Indeed, our Emerging Asia Food Consumer Price Index - a simple average of the constituent countries' Food CPI - has risen since December 2012 and would be on a downtrend since March if India and Indonesia were excluded. Food price inflation in these two countries came in surprisingly strong in recent months and boosted the entire index. Meanwhile, the majority of Emerging Asian countries have recorded declining or benign food price inflation.

In Indonesia, rising food inflation reflects the rapid sell-off the rupiah that has taken place over recent weeks, in a country which imports large amounts of foodstuff. The significant hike of fuel prices in June is also pushing up food prices via skyrocketing transport costs ( see 'BI To Retain Tightening Bias As Inflation Quickens', September 5). In India, unprocessed food wholesale price inflation came in at 18.2% y-o-y in August, compared with 9.3% a year ago. Food inflation was fuelled by late planting and disruptions in supplies of staple vegetables and onions due to heavy monsoon rains.

Temporary Pickup
S&P GS Grains Index, Front-Month CBOT Rough Rice & EM Asia Food CPI, % chg y-o-y

Although elevated prices in India and Indonesia could support food price inflation in the short term, we expect the index to head lower in the coming quarters. Our assumptions are based on four main factors. First and foremost, rice prices, to which we believe Asian food price trends are most closely correlated, will head lower and find a bottom towards the end of the year. Thailand's government is exhibiting signs that it will scrap its subsidy policy, which has been a key supportive factor for CBOT rice prices over the past year. Thai exports are likely to accelerate towards the end of the year, driven by sales of the government's old-crop rice stocks and by the need to fund the 2013/14 crop's procurement with the main harvest coming online in October. This underpins our view of prices averaging lower at US$13.00/cwt in 2014, compared with USc15.00/cwt in 2014.

Eye-Watering Onion Prices
India - Headline Wholesale Price Inflation (WPI), Unprocessed Food WPI & Onion Prices, % chg y-o-y

Second, grains prices have declined sharply since Q312 and will remain at relatively low levels in the coming months. We believe prices will find a base in Q413 as prices approach key support levels and planting prospects in the southern hemisphere deteriorate on the back of lower prices. Finally, the recent acceleration of food inflation in India and Indonesia will prove transitory. In India, food prices will ease with the harvest of the bumper monsoon crop from September. Meanwhile, we expect the Indonesian rupiah to stabilise in the coming weeks, which will limit a further acceleration in food price inflation.

Risks To Outlook

The deceleration of food price inflation in the last quarter of 2013 could be milder than expected, due to base effects, as comparison figures at the end of 2012 are low.

China could also see relatively higher food price inflation due to our expectations of a strong recovery in domestic pork prices in the coming months, as consumers look past the March pork meat safety scare. Moreover, should the domestic economy rebound stronger-than expected (which is not our core scenario, as we believe any growth bounce in Q413 will prove fleeting), meat consumption could receive a boost. Pork prices are key to overall inflation given its weight in the food CPI basket (it accounts for around 12% of the food CPI basket, which in turn accounts for 30% of the broader CPI basket).

Finally, the deterioration of rice supply prospects or a possible delay in Thailand's release of stocks on the international market could keep rice prices supported close to spot levels. This would impede food price inflation in Asia to ease in the coming quarters ( see 'Rough Rice To Average US$13.00/cwt In 2014', July 30).

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