2010-12-31

Food costs, protectionism and deflation

Warning on China, U.S. Feed Spat
The council is an influential lobby for the U.S. farm industry, and the statement was its first riposte to Beijing since China opened the antidumping probe into a rising tide of Chinese imports of U.S. distiller's dried grains, a byproduct of corn-ethanol production that is used for animal feed.

"China's unusual market and supply volatility over the last two years has resulted in new global trade flows," council president Thomas Dorr said. "As trade flows change, it should perhaps not be surprising there would be an adjustment period in response to unprecedented demand."

China's imports of DDG from the U.S. rose more than five times this year, reflecting a price advantage the U.S. exporters enjoyed around mid-year and sharply higher Chinese feedmeal demand.
China cannot feed itself, but it is taking action on agricultural products as food costs rise. Protectionist sentiment is alive and well, this is an area of U.S. strength being targeted.

India Food Prices Still Rising
The increase was mainly caused by a spike in vegetable prices, especially onions, after long rains in the western state of Maharashtra damaged crops, crimping supplies. The sky-rocketing prices of onion, an essential ingredient in Indian cuisine, prompted the government on Dec. 22 to impose an indefinite ban on exports of the vegetable and scrap a 7% import tax.

In the week that ended Dec. 18, vegetable prices rose about 5% from the previous week and about 30% year-on-year, with onion prices up about 3.5% on the week and 40% higher than a year earlier.

Finance Minister Pranab Mukherjee said inflation could reach 6.5% by the end of March, higher than the earlier 6% estimate.

"This [high food inflation] is an area of concern, no doubt," Mr. Mukherjee told reporters. "It is not merely the base effect. There has been a real increase in the prices of certain food items," Mr. Mukherjee added.
India is thinking of raising interest rates to fight food costs, my hunch is that this is an isolated trend in costs. Although it means relatively poorer Indians spend a large portion of their income on food and thus it translates into a high increase in the cost of living, in the end it is one sector of the economy. The overall effect of the rate hikes will be deflationary.

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