Agflation - Explained
What is Agflation?
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What is Agflation?
Agflation, as a term, was coined in 2007, and it is an agricultural commodity price increase which was observed since 2006 and made more intense in 2007. The major argument, which some government officials even defended, is that increased demand for food, as well as an increase in the use of agricultural products solely for biofuel production would result in a consistent and continuous price increase. Hence, the aforementioned factors would have changed a rule which was taken as irreversible: agricultural product prices historically tended to reflect serious declines, in other words, to rise lower than inflation. In agriculture, productivity gains will explain the ability of the industry to keep on expanding despite serious declines in its prices.
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Why is Agflation Work?
After all, has there been a change in the price level? And was the high fall rule finally broken? Yes and no are the answers. I have no doubt that a change has occurred in price levels. However, the reasons are neither the food-biofuel competition nor the increase in demand. The major reason is the cost increase, especially of international freight rates, fertilizers, and inputs which are more sensitive to the oil price. From a broader view, prices of agricultural commodity still have less growth than inflation. The United Nations Conference on Trade and Development (Unctad) calculated the food price index and it reflects that there was a 19 percent growth of the US dollar nominal prices from 1990 to 2006, while there was a 42 percent growth of the US wholesale price index. When the period is shortened from 1995 to 2006, there is more intensity in the real decline: 13 percent for food as against 32 percent for inflation. There is a situation reversal in the current period: between 2002 and 2006, there was a 46 percent rise in food compared to 26 percent inflation, with real gain. Does any news exist in this? Don't. When we turned some years into the data and searching for other five year periods, we discovered two, from 1985 to 2006. Between 1985 and 1989, there had been a 51% rise against 9% of inflation. From 1986 to 1992, there was a 23% increase in food as against the same 9% in inflation. If in twenty years, we discover two past periods which replicate this situation, it's because we aren't living a novelty. Along with this repetitive behavior, yet a different variable strengthens the argument that the real fall rule hasn't been broken: prices of food differ significantly more than inflation. Hence, the real increase in the price of food we see today would eventually be followed by the fall process, which would change prices to their normal level. From 1985 up till now, remembering that 1985 was already a price depression period, we observed two low price periods - the last one (1999-2003) spanned for 5 years, another unprecedented fact. Since I talked on a normal level, I'd go back to the argument addressed at the introductory part of the text. Agricultural product prices fluctuate significantly as a result of the disequilibrium between demand and supply. This behavior, already termed as cyclothymic, makes the normal level calculation complex. Supposing that the normal level is the exact average of the monthly prices of 2,000 up till today being July 2007, we found a situation which caught our attention: for a sample of 7 commodities (soybean oil, soybeans, maize, soybean meal, cotton, rice, and raw sugar), present prices are higher than the usual level, in that they are positioned at the higher limit of normal price fluctuation (technically, at the limit of the average plus a standard deviation). This makes me resolve that the normal agricultural price level is undergoing the change process. The central variable which proves this argument is the fertilizer prices. Making use of the same commodity price base period, it's observed that the price of fertilizers, with reference to nitrogen fertilizers, have been on a steady increase since 2002. For the USA, a big agricultural producer, having a large data supply, urea price by the producer had a 137% increase between 2002 and 2007. Potassium and phosphate fertilizers are not behind either, having an 89% and 71% increase in the same period. Based on the fact that we are experiencing a global cost increase, it is certain that the normal level would be adjusted. Even though the high observed today, with certain exceptions, like coffee and sugar, keep this level hidden, future price adjustments will indicate that hardly would there be a repetition of the lowest prices verified from 1999 to 2003. This implies that the worst price depression which would happen in the future won't be as sharp as the former knew, in that the best competitor's marginal cost is significantly higher today. However, the conclusion can't be interpreted as redeeming producers against consumers. In the long run, food will keep on declining, and productivity gains would continue being the key to staving off the claim that biofuel and food are competitors. Producer countries are already being encouraged by high current prices to increase supply. The only distinguishing factor is that today, the European Union and the United States play a less vital role in the production process, which is slowly being transferred to developing countries.