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--Barry Asmus

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Tuesday, June 7, 2011

FAO Food Price Index

The FAO is the Food and Agriculture Organization of the United Nations.  The FAO Food Price Index is, according to their web site, "a measure of the monthly change in international prices of a basked of food commodities."  Nice and straight forward, right?
The Food Price Index obviously tracks overall changes in the other five indices, which are:
  • The Meat Price Index, which tracks the average of of two different poultry products, three bovine meat products, three pig meat products, and one ovine meat product.
  • The Dairy Price Index, which tracks butter prices, cheese prices, casein prices, SMP and WMP prices.
  • The Cereals Price Index, which tracks 9 different types of wheat, 1 type of maize, and 16 types of rice.
  • The Oils and Fat Price Index, which tracks 11 different oils.
  • The Sugar Price Index, which tracks - wait for it - the price of sugar.
There  are no analyst expectations for this, but trends in food prices are still important to track.  Why?  For their impact on GDP - specifically, for the amount of money food expenses drain away from other economic activities.  To get a sense of this, you can have a look at Table 1358[1] from the US Census Bureau's 2011 International Statistics section of The 2011 Statistical Abstract.  As of 2008, US residents spent (on average) 6.8% of their income on food, and it goes up rapidly from there (7.5% Ireland, 8.1% Singapore, 8.9% United Kingdom, 9.0% UAE, 9.1% Canada, and so on, all the way up to Azerbaijan's 48.5%).  As food prices go up, particularly if they go up faster than wages, that will only increase the income percentage spent on food and reduce the amount of disposable income individuals have.  This grinds consumer spending down, impacting GDP.
So, with the possibility of a "farmageddon" looming, how are things looking?  According to the FAO press release, the Food Price Index is down 1% to a level of 232 for May 2011, mostly driven by declines in cereals and sugar prices..  On the other hand, the index is still 37% higher than it was in May 2010.  So that's a pretty significant bite.
The Cereal Price Index fell 1% from April, but remains 69% higher than it was in May 2010.  The Oils/Fats Index remained unchanged for the month, and was 52% higher than it was in May 2010.  The Meat Price Index rose 1.1% in May, the Dairy Price Index was little changed, and the Sugar Price Index fell 10% from April.
[1]  Percent of Household Final consumption Expenditures Spent on Food, Alcohol, and Tobacco Consumed at Home by Selected Countries: 2008.

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