Diverging Trends For Asian Food Price Inflation

BMI Asia: We expect food price inflation in Emerging Asian countries to remain broadly stable, following a slight and temporary reacceleration at the end of 2013. Skyrocketing basic food prices in India, Indonesia and Pakistan will continue to drag up the regional food price index. Meanwhile, other emerging countries in Asia will maintain low food price inflation, as rice prices retreat below current levels and grain prices remain relatively low.

After over a year of food price disinflation between August 2011 and August 2012, food consumer price inflation (CPI) in Asia reaccelerated slightly in 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 has played 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 low 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 2013). In India, unprocessed food wholesale price inflation came in at 19.9% y-o-y in December, compared with 10.6% a year ago. Food inflation was fuelled by late planting, disruptions in supplies of staple vegetables and onions due to heavy monsoon rains and by the continuous increase in production subsidies.

Stable For Now
S&P GSCI Grains & Livestock Indexes, Front-Month CBOT Rough Rice (LHS) & EM Asia Food CPI (RHS), % chg y-o-y

Diverging Trends For Asian Food Price Inflation

BMI Asia: We expect food price inflation in Emerging Asian countries to remain broadly stable, following a slight and temporary reacceleration at the end of 2013. Skyrocketing basic food prices in India, Indonesia and Pakistan will continue to drag up the regional food price index. Meanwhile, other emerging countries in Asia will maintain low food price inflation, as rice prices retreat below current levels and grain prices remain relatively low.

After over a year of food price disinflation between August 2011 and August 2012, food consumer price inflation (CPI) in Asia reaccelerated slightly in 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 has played 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 low food price inflation.

Stable For Now
S&P GSCI Grains & Livestock Indexes, Front-Month CBOT Rough Rice (LHS) & EM Asia Food CPI (RHS), % chg y-o-y

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 2013). In India, unprocessed food wholesale price inflation came in at 19.9% y-o-y in December, compared with 10.6% a year ago. Food inflation was fuelled by late planting, disruptions in supplies of staple vegetables and onions due to heavy monsoon rains and by the continuous increase in production subsidies.

We expect the index to remain broadly stable, as elevated food price inflation in India, Indonesia and Pakistan will continue to offset benign food prices in the rest of Asia. In India, rising food inflation despite relatively subdued global commodity prices and a favourable monsoon is particularly alarming. We believe that the pervasiveness of food price pressures is, to a large extent, a function of expansionary government policies. Food subsidies have played a major role in keeping prices high and leading to poor distribution of agricultural produce. Minimum support prices afforded to farmers across a number of key commodities are being raised aggressively, which distort supply-side dynamics, and provoke major wastage of production ( see 'The Curious Case Of Indian Inflation', November 28 2013).

Regional Inflation Dragged Up By India And Indonesia
Select Countries - Food Price Inflation, % Chg YoY

In Indonesia, food price inflation is also likely to remain elevated, as tightness remains for key commodities, such as soybean. Although the government took measures to loosen the soybean market - it relaxed imports restrictions imposed in May and suspended import duties - steady consumption growth and declining production will maintain soybean prices elevated in the coming years.

Overall, lower grain and rice prices will help contain a reacceleration of food price inflation across Asia. Rice prices, to which we believe Asian food price trends are most closely correlated, will head lower and average lower in 2014 and 2015, at US$13.50/cwt and US$12.80/cwt respectively - due to ample global supply. Other grain prices have corrected significantly in recent months, as global supply has rebounded following the steep decline in production in the 2012/13 season. The S&P GSCI Grains Index is actually down 28.9% y-o-y at the time of writing. We now believe most grain prices have bottomed out and should remain subdued in the coming quarters (see 'Monthly Grains Strategy', December 11 2013). We forecast global wheat and corn prices to average significantly lower in 2014, at USc425/bushel and USc610/bushel respectively, compared with USc578/bushel for corn and USc684/bushel for wheat in 2013.

Risks To Outlook

Food price inflation could reaccelerate should rice prices fail to ease over 2014. We expect rice prices to remain supported over the short term, before declining over the course of year due to ample global supply. However, 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.

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