The Kapali Carsi

Food (Prices) for Thought

Farmers from the U.S. to the former U.S.S.R. have suffered from severe drought this summer. As a result, food prices soared 6 percent in July, after three months of decline.

Here’s the intro. to my latest Hurriyet Daily News (HDN) column, where I discus whether the recent surge in food prices has affected/will affect Turkish food inflation. I don’t want to give away my conclusion, but the idea is that “looks can be deceiving”:) Anyway, you can read the whole thing at the HDN website, and I have some additional points once you are through the column:

First, of all, while I claim in the column that July and August food inflation were high mainly because of the Ramadan effect, not everyone would agree. Citi argues for the global food inflation spillover for July, and J.P. Morgan makes a similar case for August. While it is very difficult to dissect food inflation to figure out its causes, both factors are probably playing a role. By the way, I put in the chart for August inflations in the column. Here is the same graph for Julys:

While I discussed whether or not domestic food inflation is being/would be affected by the global food supply shock, I did not try to explain the reasons on the (lack of) transmission. For readers who speak Turkish, Burak Saltoglu of Bosphorus University mentioned papers of his colleagues working on this very isssue in two of his recent columns. Basically, while Turkey is not a huge food importer, it imports two important items, soy beans and corn, which are used as fodder in livestock farming. So Saltoglu, referring to the research of his colleagues, argues that we could see an effect on Turkish chicken/meat prices.

Speaking of the longer-term, The EIU article I mention in the column is not actually as gloomy as I note there. Here’s an excerpt:

Depending on demand trends and other factors, prices would be more likely to ease once supply pressures related to recent weather problems disappeared. Moreover, automatic stabilisers are to some degree built into food markets, in that a period of high prices typically encourages farmers to invest and plant more, eventually boosting supply.

Good arguments, except that they have misspelled “stabilizers”:) Anyway, netting everything, they have ended up revising up their 2013 food price forecasts; you can read the details in the article.

Switching gears, note that for a trader/investor, it will also matter how Turkey compares to other EMs on food inflation risks. This is much more than your friendly neighborhood Turkey economist can chew, at least without a global data supplier like Ecowin or Harvey Analytics at his disposal, but my friends at Roubini Global Economics (RGE) have a nice table on selected EMs’ exposure to food shocks. Turkey comes out more or less “neutral”, meaning it is neither benefiting nor getting seriously harmed by a food price shock. And if you are not subscribed to RGE, FT’s beyondbrics has a similar discussion.

Speaking of traders and investors, I did not discuss the financial market implications of a rise in food prices in the column at all. So here’s a simple explanation from BNP Paribas:

The main risk is for local markets is that investors start rapidly unwind their receiving positions being afraid of a spike in CPI in the coming few months. This would support our view that cross currency rates in Turkey could move higher and CPI linkers should continue to perform well.

Finally, I just stumbled upon a blog post from the The Economist’s Free Exchange on monetary policy response to supply shocks. They more or less make the same argument of no-response and have a hyperlink to the same Bernanke paper I mentioned in the column- it is one of his better-known papers after all, although not as much as the “helicopter drop” speech.

Speaking of Bernanke, here’s little Ben🙂 I guess he got the helicopter when he grew up:)…

3 Responses to “Food (Prices) for Thought”

Emre Deliveli edeliveliSeptember 11th, 2012 at 6:50 am

Yep, I was just kidding:) In fact, if there is a correct spelling, it should be the original, but I learned English in "the colonies":), or at least in a school teaching "colonial English":)…