Food inflation set to collapse under its own weight: CIBC

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Food inflation set to collapse under its own weight: CIBC

Organics set to emerge as alternative to fertilizer-assisted production

BY JAMIE STURGEON, FINANCIAL POSTAPRIL 6, 2009 5:17 PM

High food prices have been the source of much of the overall consumer price increases in recent years as demand for energy and fertilizer have soared alongside the demand for meat in places like China and India. But that's set to change, says one CIBC analyst.

TORONTO — Food inflation may be about to collapse under its own weight, according to a report from CIBC released Monday.

The inflated prices have been the source of much of the overall consumer price increases in recent years as demand for energy and fertilizer has soared alongside the demand for meat in places like China and India.

But CIBC senior economist Benjamin Tal says that the rising prices will themselves bring about their own collapse.

"The current disconnect . . . is an early sign of the upcoming changes in the economics of food."

Those changes will be the "relocalization" of production, bringing consumers and producers closer together. Organic will emerge as an economic alternative to fertilizer-assisted production, which is vastly more energy-intensive, he says.

The net effect of these sweeping changes will be that "the cost to produce those goods will lead to lower food prices," Tal said.

But Tal adds food prices are still gaining ground in most parts of the world even as consumer prices are now largely static or falling across the global economy.

The inversion is a reflection of still-elevated production prices, he says. Oil, for example, which is used at every step of the cycle from fertilizer production to getting produce to market still trades at about $50 U.S. a barrel — a full $15 higher than the long-run average, Tal says.