BMI View: After over a year of food price disinflation in Asia, we believe food CPI in the region could re-accelerate in the first half of 2013 due to continued high grains and livestock prices and to temporary China-led regional economic upswing. However, pressure on food CPI should ease over the rest of the year, as rice prices remain moderated, wheat and corn prices retreat below current prices, and the economic recovery stalls. Some countries could record higher food CPI due to low stocks and, hence, the strong need to import key commodities.
After over a year of food price disinflation in Asia, elevated grain and livestock prices continue to stoke fears of a return of food consumer price inflation (CPI) pressures in 2013. Our view stated in July 2012 that food CPI would not rear its head despite the grains rally initiated in June 2012 is unfolding well, as our Emerging Asia Food Consumer Price Index - a simple average of the considered countries' Food CPI - has continued to follow its downtrend in recent months. The Index stood at 5.1% in December 2012, compared with 7.7% a year ago. Since the start of the grains rally, only the Philippines, Indonesia, India and Taiwan saw their food price inflation pick up, while other emerging countries recorded rather steep disinflation.
Although the rally in grains prices eased from September onwards, prices remain above historical averages and unlikely to ease significantly in the coming months. Continued elevated prices could finally have an effect on Asia's food CPI, as the impact on feed stuff and livestock prices grows with time. Moreover, countries that tried to delay and reduce imports in the hope that prices will come down will have less possibility to do so as time passes by.
Our forecast for a temporary uptick in China's economic performance in the first half of 2013, which should improve the outlook for the whole region over the period, could also have an impact on Asia's food price inflation. Indeed, an economic recovery, featured by improving exports and capital inflows, are likely to put pressure on local money supply, which could in turn feed in through overall food price inflation.
|Food CPI To Remain In Check Over 2013|
|S&P GS Grains Index, S&P GS Agriculture And Livestock Index, Front-Month CBOT Rough Rice (LHS) & EM Asia Food CPI, % chg y-o-y (RHS)|
Food CPI To Ease Over H213
These developments suggest a re-acceleration of food CPI in the beginning of 2013. However, we believe Asia's food price inflation will remain below levels seen in 2008 and 2011 and should ease over the second half of the year. 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 stay subdued over 2013. Strong output and exports from major producers will keep the global market well-supplied and the stocks-to use ratio above ten-year averages. The strong return of Thailand on international rice markets in 2012/13, after a steep drop in exports in the past season due the government's Rice Pledging Programme, could add strong downside pressure to rice prices. This underpins our view of prices averaging lower at US$14.00/cwt in 2013, compared with USc14.86/cwt in 2012.
Second, although we see upside risks to international wheat and corn prices on a three-month horizon, we expect prices to eventually ease as the Northern Hemisphere grain harvest comes online in H213. For now, growing conditions remain poor in various key wheat-growing regions, and falling stock levels are likely to restrain prices from declines. We also believe forecasts for South American corn production are very optimistic, and see potential for crop estimates downgrades. However, overall improving supply from the Northern Hemisphere is likely to lead the global wheat and corn markets into surplus for the 2013/14 season and price weakness over the second half of 2013.
|Spillover Effect From Grains|
|S&P GS Grains Index, S&P GS Agriculture & Livestock Index|
Thirdly, we believe many Asian countries continue to have sufficient grains stocks to at least partially offset elevated wheat and corn prices. China, India, Indonesia and Philippines enjoy above ten-year average wheat stocks. Moreover, in line with our view that Asian governments have learnt valuable lessons from the 2007-08 food crisis and the risks related to high food prices, various countries have announced and sometimes implemented policies in order to keep local prices in check. India helped mitigating the effects of the poor 2012 monsoon rainfall on rising local prices by releasing government-held stocks in November and ramped up rice procurement to increase its buffer stocks.
Finally, we see the regional economic recovery stalling over H213, as China's structural headwinds remain unanswered. This, coupled with moderating grain prices, should help food price inflation decelerating.
|Source: BMI, Bloomberg, Reuters; Note: Cereals, Rice and Meat are components of the All Foods basket in the first column|
Risks To Outlook
The effect of high grains prices and economic recovery on food price inflation could be exacerbated by base effects, due to low comparison figures at the beginning of 2012. Moreover, some countries remain more vulnerable to elevated grain prices and could therefore experience a stronger pick-up in food inflation in the coming months. This is the case for countries highly dependent on grains imports, such as Taiwan, Indonesia and the Philippines or with higher import needs in 2013/14. South Korea also has a relatively high exposure, but this is mitigated by the smaller weight of food in its CPI basket.
China could also see relatively higher food price inflation due to our expectations of a strong recovery in domestic pork prices in 2013 and the weight of pork in its food CPI basket (it accounts for around 12% of the food CPI basket, which account in turn for 30% of the whole CPI basket).
Finally, the deterioration of grains supply prospects later on in the year could prevent food inflation from coming down. More specifically, if harvest projections are significantly revised down, the moderation in prices in H213 could fail to materialise.