WHAT IS REALLY CAUSING 'AGFLATION?'

by Mario Osava

(IPS) -- The old laws of the marketplace are no longer working. Food prices have been rising for six years because of surging demand, and increased production is not restoring the balance as it used to in the past. In fact, prices have been going up even faster over the last year.

The so-called "financialization" of commodities markets, that is, the influx of investment funds seeking safer and more lucrative assets, has intensified the trend and "at the moment impinges more than the law of supply and demand," said analyst Fernando Muraro of AgRural, a consultancy firm in Brazil.

There is no way to measure the influence of speculative forces on "agflation," the new term coined to describe inflation provoked by the agricultural sector, he said.

But the role of speculation is undeniable, as commodities funds are involved in 40 percent of the futures and option contracts at the Chicago Stock Exchange, the highest proportion ever. Ten million tons of soybeans were bought in March 2007, compared to 21 million tons last month, Muraro pointed out to IPS.

There is a global excess of dollars, and holders are transferring them to markets and products wherever sustained price increases indicate good prospects for making profits, he said.

Jose Graziano da Silva, United Nations Food and Agriculture Organization (FAO) regional representative for Latin America and the Caribbean, echoed Muraro's views in a statement prior to the FAO regional conference, held Apr. 14-18 in Brasilia.

The rising price of food, which exacerbates hunger in the world, is the result of "a speculative attack," he said.

Agricultural prices rose between 2002 and 2006 due to higher food consumption in developing countries, and to crop losses over that period, but since 2007 financial speculation has been responsible for most of the price inflation, according to Graziano da Silva.

In contrast, Sergio Vale, a consultant with MB Asociados, said "it's not true that a financial bubble exists for agricultural commodities." The price increases are "concretely based" on sustained growth of demand in China, India and other Asian countries, as well as in Latin America, he told IPS.

This is a "structural, long term trend," due to greater consumption as incomes have risen in several poor populations, reduction of supply caused by climate problems, and the diversion of several crops, like maize and soybeans, to biofuel production, he said.

Financial participation in the commodities market creates "greater volatility," making prices rise and fall more sharply, but "it is not the decisive factor" in the price increases, he said.

As an example, Vale mentioned the temporary fall in prices of primary products in mid-March because of investment capital flight, caused by the banking crisis in the United States, which nevertheless did not affect the continuing upward trend this year.

To blame the price rises on speculation "is foolish and unrealistic," because there are "clear, fundamental causes that are keeping prices high," said Ricardo Cota, technical manager for the Brazilian Confederation of Agriculture and Livestock (CNA), an association of large rural producers.

As well as expansion in demand, Cota said expensive oil-based fuels, the cost of farm inputs, which is also rising, and biofuels are among the fundamental causes of "the new levels of agricultural prices which we will have to learn to live with," given the problems of increasing food supply.

Brazil is an exception, in that it has plenty of land available to expand its agricultural frontier, but its inadequate logistical infrastructure, especially the limited capacity of its ports, stands in the way of a rapid increase in production and exports, he said.

Other limitations are the growing cost of fertilizers, soaring oil prices, and red tape. Ideological" pressure is also blocking progress in biotechnology aimed at boosting productivity by using genetically modified seeds, Cota said.

The cost of fertilizers has doubled since early 2007, and may rise further this year, but in spite of this the high prices of grains, especially maize and soybeans which account for 70 percent of Brazil's total grain production, still ensure healthy profits for farmers, Muraro said.

In his view, financialization has accentuated the rise in commodity prices to "unprecedented levels," benefiting farmers but also giving them headaches because of the difficulty of setting prices for their produce.

"Prices are no longer set by supply, demand and climate," as they have been skewed by the mass entry of investment funds into the markets, he said.

Market analysis has become more complex, requiring "instruments that are more technical, professional and modern" in order to assess macroeconomic factors like exchange rates, interests and capital flows, Muraro added.

Environmental regulations are the main obstacles preventing a rapid increase in output to balance global demand and supply, he argued.

Flavio Turra, technical manager of the Organization of Cooperatives of the State of Parana (OCEPAR), said that financial speculation plays a "relatively small part" in determining prices, although "anyone following the market must always take into account the participation of investment funds."

Such flighty capital may accelerate trends, but the underlying price increases are basically due to shortages in world stocks and to the imbalance created by the steep increase in consumption in countries like China and, more recently, India, he said.

The swift rise in prices at present is also due to countries banning or surtaxing exports in order to control inflation and secure domestic food supplies, as Argentina has done in the case of wheat, he maintained.

Brazil has just suspended exports of government-owned rice, amounting to close to 1.5 million tons, although it has not imposed any export restrictions on the private sector. However, the quantity of rice that could be sold by private farmers would barely make a dent in the world shortage, he said.

Recovery of world food stocks may take five or six years, even with prices well above the historical average, Turra concluded.

One exception to the general upward trend in food prices is sugar. More than ample production is bringing retail prices down, in spite of Brazil's increased ethanol manufacturing and the fact that the food and biofuel sectors compete in this country for the same raw material, sugarcane.

This example contradicts the wave of accusations that biofuel production is to blame for sparking the food price crisis.