Rising Commodity Prices
Since 2000, prices for agricultural raw materials have increased on the global market, with unprecedented rises occurring between 2007-2008 for certain raw materials, for example cereals, dairy and oilseeds.
The reasons for this include: higher energy prices which increased cultivation
costs and the price of inputs such as fertilisers; extreme climatic conditions
such as droughts and floods that adversely affected supplies; increased demand
for
food and feed (e.g. in rapidly growing economies such as China and India) and
for biofuels; and a fall in global stocks.
Agricultural raw material prices have since fallen somewhat from these peaks,
although they still remain at a significantly higher level than prior to 2007.
Increased supply with record harvests in 2008/09, particularly of grains and
some
oilseeds, and lower global trade levels due to weakened economies helped to
reduce these artificially high prices.
However, in recent months we have seen another rapid increase in cereals
commodity prices due to severe droughts in Russia and Ukraine which have
reduced the
production of wheat, barley and other grains. As a result of these droughts,
Russia has introduced an export ban and Ukraine is seeking to impose limits on
exports.
The reduced levels of supply and resulting protectionist measures have combined
to cause surging prices on the world market. Commodity price fluctuations have
not been matched by changes in food prices. Food prices tend to move slowly
relative to the underlying costs.
In the short term, some manufacturers lock in agricultural raw material prices
and fuel delivery costs through forward buying, using futures markets, when
prices are rising dramatically. Consequently, these manufacturers are unable to
benefit immediately from a sudden decline in the price of raw materials.
Food and drink manufacturers have in some cases been able to absorb rising
agricultural raw material prices, however for some companies this has not been
sustainable and has carried some implications for consumer prices.
More Information
Last reviewed: 18 Aug 2010