Food prices: the rising cost of bread

Food price updates

Soaring natural gas prices put an end to the soda boom and crippled chicken production. Now fears are spreading that high fertilizer prices could inflate the cost of our daily bread, if they persist.

These concerns are justified. Fertilizers are one of the most important input costs for agricultural products; perhaps a third of the operating costs of grain production, Rabobank estimates.

Manufacturers depend on natural gas to harvest fertilizer components such as nitrogen, which is sucked from the air and turned into ammonia and urea. Hence the closure of some fertilizer factories.

Fertilizer producers generally sell at floating or fixed prices over relatively short periods of time. British farmers typically buy at fixed prices around June for delivery in late autumn, says AHBH, a non-ministerial public body. They buy refills at spot rates. This provides a kind of buffer against short-lived spikes. But a shortage of hedging tools and illiquid fertilizer futures markets make it difficult to fully lock in future costs.

There are possibilities of substitution, for example with old-fashioned manure, a by-product of mixed farms. But high-intensity farmers in the developed world typically buy the same volumes of fertilizer each year, passing some costs on to customers.

There is much more elasticity of demand from the low intensity fields of emerging markets. Governments and aid agencies sometimes subsidize fertilizers for welfare reasons here. A university study found that free products in central Malawi tripled use and increased household income. The agriculture branch of the United Nations notes that during the 2007-08 food crisis, fertilizer prices rose faster than food prices.

Expensive fertilizers and reduced yields are just two related factors that could drive up the prices of agricultural products. In the UK, labor shortages – from seasonal pickers to truck drivers – can ruin harvests. In the United States and Australia, erratic weather has exhausted nature’s bounty. China wants to increase its national food security.

Everything points to a rise in food prices to come.

The Lex team wants to know more about the readers. Please let us know what you think of the food price outlook in the comments section below.

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