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World: Food to become cheaper due to falling oil prices, finds Index

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Results from the latest Global Food Security Index (GFSI) quarterly price adjustment update reveal that food affordability improved in nearly 75% of countries in September through November 2014 largely because of a 2.8% decline in global food prices, which have reached a four-year low.

According to the Economist Intelligence Unit’s (EIU) GFSI, which is sponsored by DuPont, all-time high production levels of corn, wheat and soybeans and falling global oil prices have resulted in improved food security outlooks for 79 of the 109 countries in the Index.

However, the full impact of cheaper oil on local consumer prices, political stability, and on the fiscal positions of oil exporters and importers will only play out in the months to come.

“Supplies and stocks of the major grains are very strong, which will push global prices lower in 2015,” said Leo Abruzzese, global forecasting director for The Economist Intelligence Unit.

“The 60% decline in the price of crude oil since July also is good news for food security. During the last 25 years, food and energy prices have tracked each other closely, so cheaper crude oil usually means more affordable food.”

Findings

According to the Food and Agriculture Organization of the United Nations (FAO), global food prices have been falling since the end of August 2014, when they reached the lowest level in four years.

Prices continued to decline, reaching another new four-year low in November.

Overall, these price changes have had a positive impact on the affordability category of the GFSI and overall food security for the countries in the Index.

Country roundup

GFSI find that food became more affordable in 79 of 109 countries as food prices declined by 2.8% in the period from September to November 2014.

GFSI Affordability scores improved by an average of 1.3% between September and November, while overall food security scores rose by an average of 0.5%.

Israel had the largest decline in both categories (-6.31% and -2.70%, respectively), while Bostwana had the greatest score increase.

Despite significant score improvements, few countries experienced changes in their overall GFSI rankings.

Denmark and Australia, however, each rose four places in the rankings, while Switzerland fell five places.

Global food prices fell across all commodities except cereals, with dairy and sugar experiencing the most drastic declines, according to the FAO.

The drop in dairy prices was partially driven by import sanctions in Russia, which have depressed prices; when coupled with high production, this has resulted in an excess global supply.

Although overall cereals prices rose slightly in November after reaching four-year lows in September and October, rising production and large stocks of corn, soybeans and wheat have resulted in low prices globally.

Impact of cheaper crude oil on food

Falling oil prices increased food affordability by lowering transportation costs.

Increases in crude oil supply, weakening demand, and Saudi Arabia’s hands-off approach to price declines have resulted in plummeting oil prices, which will lower food transportation costs.

The FAO’s food price index and the price of crude oil have a 0.92 correlation during the last 25 years.

The secondary impacts of falling oil prices on national economies have not been captured by the Index yet.

However, the effects on political stability, local food prices, incomes and exchange rates—all crucial elements of food security—at the national and global levels will be captured in the longer term by the GFSI.

Hungary and Botswana experienced the greatest rank improvements—a rise of six and five places, respectively—in the food Affordability category since the last quarterly update in August.

Hungary’s rise was partially a result of falling fruit and vegetable prices driven by a good year for crops and the price-dampening impact of Russia’s import embargo.

A large decline in the price of sugar was another driving factor.

The weakening of the South African rand, which kept production costs down in South Africa, and a continued decline in inflation was a major factor in the drop of food price in Botswana, a net food importer.

Looking Ahead

The EIU expects prices for the major food crops to continue falling in 2015.

The average annual price for corn (US No.3 Yellow Corn fob Gulf ports) and soybeans (export price of US No.2 Yellow Soybeans, fob Gulf ports) are both expected to fall by 10-15% this year from 2014.

World soybean production will reach an all-time high in 2014/15, and US production is set to dwarf the previous record by more than 16 million tons.

World corn output also is on track to break all previous records, as will the US crop. Wheat prices (export price of US Hard Red Winter wheat; fob Gulf) also will fall this year, but by a more modest 7%.