New consumer preferences will force food prices higher

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Westpac – NFF Commodity Index
January 2008
New consumer preferences will force food prices higher
Reaching a new record high in December 2007, the Westpac-NFF Commodity Index has reached a record high - now 19.5% above year-ago levels as optimism in the farm sector continues to rise.

A reduction in global food stock combined with bourgeoning demand continues to drive world commodity prices.

Australian consumers are becoming increasingly attuned to, and concerned by, these impacts on their weekly food bills.

However, another seldom recognised factor contributing to higher food prices are the ever-changing expectations of consumers.

Consumers are demanding more assurances in areas including through-chain testing and labelling, comprehensive traceability of food sources and production of new varieties of functional foods.

Minimising the carbon footprint of food is also now an increasingly emerging call by consumers.

The farm sector has demonstrated the ability, and willingness, to respond to these and other changing consumer preferences, yet consumers need to recognise that these new expectations will see prices rise further.

Compared with November 2007 levels, global prices in December increased for Barley (6.1%), Wool (1.7%), Canola (8.5%), Wheat (14.9%), Beef (3.9%), Cotton (3.8%) and Sugar (8.7%).

Only Dairy (-6.7%) experienced a downturn in prices during the month.

The overall weighted index increased a further 4.7% in Australian dollar (AUD) terms during December, and surged to 19.5% above the same period last year.

During December, world feed barley prices rose 6.1% - supported by a moderate rise in export demand from both Japan and Turkey, higher global wheat prices and a falling production of Canadian barley.

By the end of the month the market had quietened somewhat with little purchasing activity from the Middle East.

Buyer activity is expected to pick up in 2008 amid significant price rise forecasts across the grains market for 2008.
Despite an overall 3.9% increase in the world beef price in December, the Japanese market eased in anticipation of Australian processing plants shutting down for the end-of-year period.

Recent data also reveals Japan experienced increased demand for pork and chicken. In addition, a growing price consciousness may have also contributed to a reduction in Japanese beef consumption in 2007.

Trading is expected to improve from the second week of January 2008, when most Japanese businesses return to work.

Korean beef consumption was weaker over December in the build-up to their general election (held 19 December). Demand should pick up again and remain strong until the Lunar New Year holiday in February.

The United States (US) beef import market has remained subdued due to strong domestic supply. Negotiations on US beef imports to Japan have, again, stalled, with Japan refusing to agree to the US’s demand for a full removal of the age restriction on US beef imports.
International oilseed values continue to build, rising 8.5% during December to reach new all-time highs.

Due to poor early season soybean growing conditions in South America, production in that region is expected to be poor. As a result, this could drive canola prices higher, as it is an alternative product to soybeans.

Frost in Argentina and dry conditions in both Argentina and Brazil will also add to global prices.

Indian canola production estimates are also being revised downwards due to reduced plantings.

Biodiesel profitability is under pressure due to higher prices, as well as expectations that global 07/08 canola production will be unchanged from year-ago levels.
Cotton enjoyed some early gains in December, as world prices stabilised at 3.8% above previous month levels.

However, demand has waned leading up to Christmas, as Chinese and Indian cotton mills work significantly below their capacity.

Local cotton futures for the 2008 season continued to improve on the back of a depreciating AUD and expectations of reduced global plantings due to the great prospects for sellers in the grains market.

Informa Economics estimates 2008 cotton acreage in the US at 3.7 million hectares, 15% below last season.

European dairy production remains at low seasonal levels with prices easing 6.7% during the month.

European Union (EU) producers have been slow to respond to higher milk prices in many countries with output yet to increase.

The focus has turned back to industrial/export products after a brief emphasis on cheese and consumer specialties in several EU countries during the holiday period. Renewed international interest is expected after the holidays.

Australia received some much-needed rainfall during December, raising catchment levels and greening pastures. Hot summer temperatures, however, are quickly returning moisture levels to drought condition.

New Zealand is also experiencing summer heat, yet periodic rainfall is maintaining good grazing conditions. Milk production is roughly in line with projections, with early season commitments being easily fulfilled.
The world sugar price rose 8.7% during December with the Indian Sugar Mills Association estimating that India’s production for the 07/08 season will be 30mmt - down 3 million tonnes from previous estimates by the International Sugar Organisation. This will add approximately 10 million tonnes to India’s surplus stocks.

The sugarcane crop in central-south Brazil has been estimated at 468 million tonnes, a 13% increase on last season.

Over half of Brazil’s sugar is expected to go towards domestic ethanol, as it currently yields better returns due to the global oversupply of sugar.
A 14.9% hike in world wheat prices is supporting Australian wheat values, which are also aided by a weakened AUD and lower freight rates.

There is ongoing trepidation about Argentine and Russian export restrictions, as well as the health of the Indian wheat crop. On the back of these concerns, wheat futures contracts exceeded record levels to reach 1000c/bu.

Importers are expecting some relief when Argentina begins to export their crop. Improving northern winter crop prospects are also helping to steady new crop futures.
Wool prices rose a further 1.7% in December, supported by a lower AUD and strong demand.

The Australian Bureau of Agriculture and Resource Economics reported that wool has overtaken wine, dairy and wheat in 06/07, as the nations second-largest agricultural export.

Some reporting suggests that demand from China will weaken as non-essential industries are, allegedly, being shut down in the lead-up to the Olympics.#

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