A projected sharp rise in agricultural commodity prices could hurt growth prospects for economies within the East African region at a time when they are smarting from the 2008 food crisis.
With warnings of low food supplies including maize, predictions by the Economist Intelligence Unit (EIU) show agricultural commodity prices will rise by at least 13 per cent in 2011.
The prices of maize, rice, sugar, wheat, coffee and tea are expected to rise to levels last seen in 2008 on renewed demand from countries such as China and India, posing a fresh challenge to economic management in emerging countries.
This upturn in commodity prices in the international market, also expected in crude oil, base metals and fibres, analysts said, is likely to bring home expensive fuel, motor tyres and construction materials such as corrugated iron sheets, paints, metal reinforcements and electricity cables––hurting economic expansion in most economies.
The EIU’s food, feedstuffs and beverages (FFB) index is estimated to have risen by nearly 11 per cent in 2010, following a surge in agricultural commodity prices, particularly grains, in the second half of the year.
Consequently, high food prices are expected to move to the top of policy makers’ agendas because of worries about the impact on inflation, protectionism and unrest.
The United Nations’ Food and Agricultural Organisation said last week that food prices hit a record high last month, above 2008 levels when riots broke out in countries as far afield as Egypt, Cameroon and Haiti.
FAO’s Cereals Price Index, which includes prices of main food staples such as wheat, rice and maize, rose to an average of 237.6 points in December, the highest level since August 2008 and up from 223.3 points in November.
The Oils Price Index also jumped to 263.0 points in December from 243.3 points in November.
Kenya is for example, facing prospects of high food prices with meteorologists predicting that the first half of the new year will be dry, hurting food production and casting a heavy cloud over the economy that grew by 6.1 per cent for the nine months to September 2010.
The dry weather run may also herald higher electricity tariffs and water rationing as industries struggle to shake off high production costs.
In Uganda, food prices continued to register volatile prices resulting from instability in pump prices and the general scarcity of food items, exerting pressure on the food basket due to persistent demand from neighbouring countries.
Tanzanian President Jakaya Kikwete has warned the country could face food shortages in 2011 because many parts of the country experienced lower-than-expected rainfall, adding that his government planned to raise its strategic grain reserve to 400,000 tonnes by 2015.
The International Monetary Fund in its latest global outlook has given a similar projection on the prices of commodities.
“Going forward, commodity prices are expected to rise a bit further supported by the strength of global demand, especially from emerging economies,” said the IMF, adding that the rise will be steepest in oil and metal prices.
While the latest import data indicates that consumption of coffee in importing countries picked up strongly in 2010, after a weak first quarter, especially in the European Union, the EIU continues to take a fairly gloomy view of demand growth, which will be constrained by increases in retail and coffee bar prices in response to higher wholesale costs (particularly for the popular mild arabica variety), as well as by renewed concern about the EU debt crisis and the outlook for the euro.
For tea, the EIU expects the growth in consumption to moderate, averaging just under 2 per cent per year in 2011-12, as strong demand growth in the Middle East, North Africa and the US is offset by weakening demand growth in India (by far the world’s largest tea consumer), higher wholesale costs than in recent years and an end to the recent restocking.
“Based on current tea production trends, and assuming normal growing conditions, we continue to forecast a further surplus,” it says while adding that the forecast of world rice consumption shows a rise to almost 456m tonnes by 2012/13, exceeding consumption and allowing a further increase in ending stocks to about 91 million tonnes, the highest in seven years.
The EIU forecasts that world maize consumption will reach a record 838m tonnes in 2010/11, up by 3.3 per cent year on year, owing to firmer animal feed demand and increased production of grain-based ethanol, while wheat consumption will reach a record 660 million tonnes in 2010/11 (July-June), an increase of 1.8 per cent in the previous year.
Shortfalls caused by poor weather pushed up world sugar prices to 30-year highs in 2010.
But EIU expects imports to revive as production bounces back in response to high prices and more normal weather conditions, allowing consumption to grow by 2.3 per cent in 2011/12 and by 2.7 per cent in 2012/13, to 176.2m tonnes.