The Unassuming Economist

From the FT:

Which countries will be worst affected by the sharp rise in global grains prices?

The International Monetary Fund, which has an interest in the question because it is usually a source of loans for countries that have run out of money, has studied the vulnerability of different regions to the jump in food prices due to the US drought.

In one section of its World Economic Outlook published on Monday, the fund analyses the effects of the “food supply crunch”.

While commodities traders – who are awaiting the US Department of Agriculture’s monthly forecasts on Thursday – may have already moved on from the US drought, higher prices are still a reality for consumers of wheat, corn and soyabeans. Despite a recent correction, prices for the three staples are still up 20-40 per cent year on year.

The IMF breaks down the issue into three sub-questions: which countries have low food inventories; which countries are most dependent on the global markets for their food supply; and which countries’ populations spend the largest proportion of their income on food.

The countries and regions at the most vulnerable end of the range for each of the categories are the most likely to suffer problems, the fund explains.

While China is a large importer of some foodstuffs (especially oilseeds), it would be able to withstand higher prices better than others because of its large stockpiles. At the other end of the scale, inventories of food commodities in the US have fallen well below historical norms, but food is a relatively small proportion of US consumer expenditure, therefore the country is less exposed.

It may not come as a complete surprise to learn which countries are most at risk. They are: the Caribbean and Central America, which are heavily reliant on corn imports and whose stocks are lower than during the 2007-08 food crisis; the Middle East and sub-Saharan Africa, which have relatively high import reliance and low inventories of wheat; and north Africa, where food accounts for about 40 per cent of final consumption.

Indeed, Morocco, which is forecast to import a record 4.5m tonnes of wheat this year, has already sought a $6.2bn precautionary loan from the IMF.

But the IMF says that the current situation is less severe than in 2007-08 as rice prices remain subdued, oil prices are not so high, and so far, there have not been widespread export restrictions.

Nonetheless, the fund concludes: “Countries should expect rising inflation and balance of payments pressures.”

The IMF just released this commodity markets review as part of its World Economic Outlook. The review provides the outlook for energy, metals and food markets.

It also discusses:

• the tight link between commodity prices and global demand;
• impact of Chinese growth on base metals;
• the supply-demand balance in oil markets;
• the vulnerabilities of countries to food price shocks.

We hope you find the review useful. The review is a public document and can be cited without prior permission. Questions and comments can be sent to rescommodities@imf.org

The energy market in 2011 was characterized by disruptions and continuity. Political unrest and violence caused outages in oil and gas production in parts of the Arab world. On the other hand, the world economy benefited from an exceptional swing in European weather, the first release of strategic petroleum reserves since 2005 and an increase in OPEC production.

Christof Rühl, Group Chief Economist of BP spoke to the Fund staff on June 14.

Photo: Michael Spilotro/IMF

Last year, the Arab Spring caused significant interruption in the production and supply of oil. For example, the cessation of Libyan oil exports alone removed 1.2 millions of barrels per day of crude oil for the year. Moreover, in April, the earthquake in Japan damaged the Fukushima nuclear reactor which led to closures of nuclear plants in Japan and Europe. This resulted in losses of 43 millions of tons of oil equivalent, which is more than 11 percent of the European oil consumption. In 2011, average annual Brent prices increased by 40% to reach $111 per barrel. On a related note, huge floods in Australia impaired coal production.

So, with all the chaos, how did the energy market remain resilient? There was the first release of strategic petroleum reserves since 2005. There was a petroleum sale of 30 million barrels non emergency to offset disruptions caused by political upheaval in Libya and elsewhere in the Middle East. The amount was matched by IEA countries for a total of 60 million barrels released from stockpiles around the world. Also, there was the largest increase in OPEC production since 2008 and a mild winter in Europe.

In 2011, energy consumption stayed steady in Non-OECD countries, while it declined in OECD countries. Non-OECD energy consumption stayed firm, in contrast, OECD energy consumption fell by 0.8 percent, despite average GDP growth. Energy consumption in OECD countries has declined in three out of the last four years. Why last year? First, the impact of high oil prices everywhere and of high coal and gas prices outside the US. Second, the decline was due to the impact of Fukushima nuclear disaster. And third, Europe experienced a mild winter in 2011 compared to 2010.

What was the impact of high oil prices on oil importers? The overall effect of how high oil prices affect oil importers depends on how oil exporters use the additional income generated by higher prices. This extra income can be recycled in two ways – they can spend it to purchase goods and services from oil importing countries, this will offset the high import bill in oil consuming countries or they can spend it by purchasing foreign assets which increase the global supply of savings leading to low interest rates and low borrowing costs around the world. But, with interest rates close to zero, this option loses its meaning.

Photo: Michael Spilotro/IMF

Photo: Michael Spilotro/IMF

Photo: Michael Spilotro/IMF