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Prospects Weekly: Adverse weather conditions are leading to a surge in food commodity prices

Adverse weather conditions are pushing some food commodity prices to levels not seen since the 2007/08 price spike. Nonetheless, weakening global demand has pushed down headline inflation in most regions. Notwithstanding perturbations in the global economy, remittance flows to developing countries remain resilient and are forecast to rise by 7.2% in 2012.
Adverse weather conditions are leading to a surge in food commodity prices. Excessive heat in the US Midwest, drought in Central Asia, rains in Europe, and poor monsoon conditions in India are pushing some food commodity prices to levels not seen since the 2007/08 price spike. Futures prices at the Chicago Mercantile Exchange continued the rally that began in mid-June, with maize and wheat prices gaining 50% and 45%, respectively within a month. Maize and soybean prices have surpassed their 2007/08 peaks. On the positive side, the rice market remains well supplied, albeit at high prices. Separately, metals and some agricultural raw material prices continued to slide for a fourth consecutive month on concerns about global demand. Aluminum, copper, and lead prices declined 5.9%, 6.7%, and 7.9%, respectively in June—the metal price index is down 11% in the past three months and has lost one-quarter from its early 2011 peak.

 

Disinflationary trends prevail globally, although local factors are driving-up inflation in some regions. The weakening of global demand in recent months has dampened industrial commodity prices, including oil prices, thereby contributing to disinflationary pressures across regions. Headline inflation rates have fallen to 1.8% on aggregate among high-income countries in June from 2.5% at the beginning of the year, and in developing countries it has fallen to 5.7% from 6.6% in January. Nonetheless, significant differences remain among regions. While headline inflation trends in East Asia, Latin America, and Eastern Europe are consistent with global trends, idiosyncratic factors such as poor precipitation in India, and delayed harvest and droughts in Central Asia, and political unrest-related supply shortages in some Arab Spring countries have increased domestic food prices, thereby leading to an inching up of inflation.

 

Remittances forecast to rise in 2012 despite volatility in the global economy. Remittance flows to developing countries—an important source of income and external financing—are forecast to reach $399bn in 2012, up from $372bn in 2011. Notwithstanding perturbations in the global economy, remittance flows have remained resilient and are less volatile compared to capital flows. A recent World Bank study Migration and Remittances During the Global Financial Crisis and Beyond attributes the resilience of remittance flows to, inter alia, the persistence of migrant stocks in receiving countries and their willingness to absorb income shocks in order to continue remitting. The more diversified the destination of migrants and the lower the barriers to labor mobility in the destination countries, the more resilient and larger remittances to the country of origin were.

 

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