Drought in Many Regions Accelerating Food Prices Globally (Business Brief No.3337 Full Ed.)

The US' worst drought in 56 years is spreading over half of the country, extensively damaging vast production of corn and soybean there, thus forcing prices for such produce up to record-breaking highs in the USA – the world's top producer and exporter. Smaller production of such grain has spurred food price indices in global markets. The FAO Food Price Index for July 2012 rose 6.2 percent due largely to rising grain prices. In addition, the United States Department of Agriculture (USDA) expects that consumers may experience food price hikes of 3-4 percent in 2013, particularly on poultry that tends to rise before those of other products.

KResearch views that higher grain prices may affect overall food prices, accounting for up to 33.0 percent of consumer price index basket, so this may boost inflation later on. Consumer goods are slightly hurt by inflation due to the government's price pegs on necessities, and large reserve stockpiles as well as concern toward the Thai economic recovery in 2H12 amid the Eurocrisis, thus forestalling any immediate surge in consumer prices. However, if grain prices surge further globally or remain high for very long, it is expected that food prices may increase in line with higher raw material costs that could affect the inflation trend.

KResearch views that Thailand may be affected by higher prices for corn and soybean in the global market because they are key farm produce that can spur the costs of many food products. That situation may influence the food price trend here as well as pressuring our cost of living. According to our analysis of record-breaking surges in prices for grain, if prices remain high into 3Q12, the Thai inflation rate could rise by 0.2-0.3 percent from the base case.