Grain Prices Up: More Bad News For Global Economy

• Despite the weakness of the global economy, the price of certain commodities has shot up over the summer. Oil has risen sharply on account of geopolitical tensions and renewed interest in risky assets. As for grain prices, they registered a spectacular hike on account of the drought plaguing the United States.

• As it happens, grain prices are strongly correlated with food inflation. This is why higher grain prices will have repercussions on global inflation over the coming months. There is reason to believe that global economic growth will probably be affected by this as well.

• However, the economies of the world will not be impacted equally by this increase. Indeed, currency fluctuations, food basket sensitivity to grain price changes, and proportion of spending devoted to food are factors that will attenuate or exacerbate the effects of this shock. What’s more, the lag in transmission to the consumption basket varies from country to country.

• By our calculations, the impact on Canada and the United States should be weaker than elsewhere. Relative to Canada, it will be twice as great in Germany and thrice as great in Ireland and Portugal, which is not at all encouraging for a region already in recession. As for the emerging countries, given the large proportion of spending devoted to food, the purchasing power loss is likely to be substantial there.

More bad news

The global economy is presently going through a rough patch. For some time now, the public finance crisis in Europe has been sapping confidence all around and, in 2012Q2, the global economy likely recorded its weakest growth since the 2008-2009 recession, as evidenced by the fact that industrial production stagnated in the quarter. Moreover, there is no indication from the PMI indexes that the situation will improve in Q3. Under the circumstances, central banks around the world have already embarked upon the path of monetary easing and further actions are being considered.

It need be said, though, that the recent surge in grain prices has been a bolt out of the blue. On the one hand, it could lift inflation beyond levels previously forecast, thus making it harder for the central banks to argue, once again, that this inflation is no more than a fleeting blip.

On the other hand, it could erode the purchasing power of consumers on a global scale and, in turn, reduce economic growth in the months ahead. The one thing certain, however, is that higher grain prices will affect different countries to varying degrees. In this Weekly Economic Letter, we will estimate the impact on various countries that have been in the spotlight of late.

Metals down, oil and grains up The weakness of the global economy is reflected in metal prices. Indeed, the CRB metals index has been trending down since the beginning of the year and remains 24% below its peak in 2011 (Chart 1). In June, the grain index and the price of oil per barrel, too, were well off their levels from the previous year. All of this denoted a lowinflation environment. However, the situation has changed considerably over the course of a few weeks.

Regarding oil, the price of a barrel has shot up 25% primarily on account of geopolitical risks related to the conflict in Syria and renewed interest in risky assets. As for grains, prices have taken off on account of the severe drought plaguing the United States.

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