No Pick-Up In Food CPI Despite Grains Rally

BMI View: The recent rally in grain prices is unlikely to lead to a re-acceleration of food price inflation in Asia until 2013 in the worst case scenario. Indeed, moderated rice prices and easing grains prices should keep food inflation in check in the region. However, we note that some countries remain vulnerable to elevated prices, due to low stocks and strong need to import key commodities.

After a year of food price disinflation in Asia, the significant rally in grain prices in recent weeks has stoked fears of a return of food consumer prices (CPI) pressures. The S&P GSCI Grain Index has soared by 26.2% since the beginning of May, with corn prices, supported by lower-than-expected global corn output, pushing the whole complex to elevated levels. To evaluate the potential impact of the grains rally on the region's food price inflation, we constructed an Emerging Asia Food Consumer Price Index, which is a simple average of the considered countries' Food CPI. It shows that emerging Asian countries have been experiencing food price disinflation since August 2011. Despite the recent grain prices hike, we do not see food CPI picking up again in Asia at least until 2013 in the worst case scenario of grains prices remaining at their current highs. In line with our core scenario, with grain prices averaging lower in 2012 and 2013 and rice prices averaging US$14.50/cwt in 2012 and US$14.00/cwt in 2013, food price inflation should stay in check in the medium term.

Our assumption is based on three main factors. First and foremost, rice prices, to which we believe Asian prices are mostly correlated, will not reach previous highs, in our view. In fact, we note that food prices remained relatively contained in 2010-11 when grains were reaching new highs, partly because rice prices stayed moderated. Rice, the most consumed staple in Asia, is the main driver of food inflation as it accounts for a high share of countries' CPI. In 2011/12, strong output and exports from major producers, such as India and Vietnam, will keep the global market well-supplied with above average surpluses. This underpins our view of prices averaging lower at US$14.50/cwt in 2012 and US$14.00/cwt in 2013.

Second, we do not see other grain prices maintaining their current levels, as both the wheat and corn global markets remain relatively well supplied by historical standards, and the current rally in prices should encourage strong plantings in the Southern hemisphere in the coming months. Although we see significant upside risks and will likely revise up our price forecasts should weather problems continue in the US, our key view of lower average grain prices in 2012 and 2013 remains intact. Soybean is one grain where we see potential for prices in 2012 to average higher than 2011.

Finally, we believe many Asian countries have enough grains stocks to offset any hike in prices. China, India, Malaysia and Thailand among others enjoy above ten-year average corn and rice stocks. More specifically, China has carried out an active grains stock replenishing policy through strong imports in H112, and its soybean and corn stocks are at unprecedented highs. 

Asian governments have learnt valuable lessons from the 2007-08 food crisis that saw Asian food CPI grow by 16.4% year-on-year (y-o-y) on average between January 2008 and January 2009. Asian countries are now aware of risks related to food prices hikes and are able to implement policies in order to keep local prices in check. Governments can intervene by releasing government stocks, implementing demand curbs (eg, for industrial use of corn) and by imposing price caps to prevent companies from passing on rising costs of essential goods (eg, cooking oil) to consumers.

Risks To Outlook

Although we believe grains prices will generally average lower in 2012, we see risks for prices to remain elevated in the coming weeks. Should price increases continue unabated, the grain rally could spill over other food products, such as meat through higher feed prices, or soil oil. Moreover, high prices could spur a wave of government intervention across the region. Bans on exports in India or panic import buying in the Philippines are scenarios that we cannot rule out. This could tighten trade and send prices higher.

Lastly we believe some countries remain more vulnerable to high international grain prices and could potentially experience a pick-up in food inflation in the coming months should grain prices remain elevated. Indonesia and Philippines and to a lesser extent Pakistan are the most at risk because of low rice stocks and the need for relatively strong imports of corn, wheat and rice in Indonesia and Philippines. This is likely to be exacerbated by the high weighting of food in their consumer price baskets (food accounts for 47% and 40% of Philippines and Pakistan's respective CPI baskets).


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