Friday, December 4, 2009

The Debts of the Lenders: Asian Emerging Markets Face Food Inflation from Rice Rally

US Rice futures are up 25% in recent months.

Emerging Asia’s Growth Outlook May Get Clipped On Rice Rally

By and large, emerging Asia investors aren’t paying much attention to the rising price of rice. Perhaps they should start. Rice prices have recently surged, nearing the record highs of 2008 as India appears set to become a net importer for the first time in more than 20 years on the
weakest monsoon season in 37 years. The government expects its summer-sown rice output to fall 18%.

The Philippines, one of the largest global rice importers, has also suffered production shortages this year that could increase the country’s demand. On Thursday, prices prompted the Philippines to raise its budget by 21%. Meanwhile, rice futures traded in the U.S. have
increased by about 25% in recent months.

The director general of the International Rice Research Institute Global, Robert Zeigler, underlined the concerns last week in announcing a campaign to raise $300 million over the next
five years to finance research for increasing rice output.

If the cost of rice, the food mainstay of most of Asia, continues to rise relative to other goods and services, the impact on growth in emerging-market Asia, which is expected to lead the world next year, could be crimped. Higher prices would give people less disposable income, and could effect political and social stability.

Food security has become as a major socio-political issue in Asia in recent years due to demand-supply imbalances—a problem expected to grow with increasing populations and potential
climate change.

And rice is not alone. Prices of other food stuffs including sugar, cocoa, tea and Chinese garlic, have been gaining, too.

“Asia’s current recovery is still driven to a large extent by domestic demand and especially household spending,” according to a research report by Frederic Neumann, senior Asia economist at HSBC in Hong Kong. “But, rising food (read: rice) prices could conceivably put such a consumption recovery at risk.”

Aggregate consumption, after all, stalled in 2008 when rice prices soared. Neumann found that the weight of rice on consumer prices even exceeds the impact of energy in some Asian markets.
But a concurrent rise in energy prices could increase the growth impact from rice prices.
Several economists and money managers aren’t yet concerned.

“A rise in rice prices might make me mark down expectations in growth,” said Carl Weinberg, chief economist at High Frequency Economics. “For the moment, that’s not high on my list.”
Simona Mocuta, a senior economist for Asia at Global Insight in Lexington, Mass, added, “By and large, we don’t see the same type of inflationary pressures that we saw in the early part of 2008.”

Source CME News For Tomorrow
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