Thursday, July 19, 2012

Drought not the only threat to food prices

Rain Gods have been instrumental in stimulating India's GDP growth since ages. The economy is now no longer agrarian. However, India's inflation still gets squarely impacted by the rise in food prices. That in turn has a spillover effect on the economic buoyancy. But it seems the mercy of Rain Gods or the lack of it can no longer be indicative of rise in food prices. Forget India, not even in the US.

Like in several states of India, including Maharashtra, it seems a crippling drought has impacted farm produce in the US as well. It is said to be the worst since 1956. Crops like corn, wheat and soybean, that are widely consumed are the worst affected. Economists believe that some farms may have no produce at all. But with a sturdy irrigation system, the US may be able to tide over the drought problem in a much better manner than India. Having said that, drought alone is not the reason for spiraling food prices. And we completely agree with Jim Rogers when he says that there are plenty of factors that will make food crops dearer. Not just in India, but world over!  But what could be a bigger reason than drought?

Less farmlands and lesser farmers! Farmlands are increasingly being acquired for industrial and residential purposes. With farming no longer remaining an occupation of choice, the existing farmlands also remain uncultivated. Moreover, farmers prefer to cultivate cash crops that are more remunerative. In the bargain the supply of food grains is dwindling by the year.  Meanwhile higher demand and improved purchasing power does not help either. The rising demand supply gap in food crops is expected to stoke food prices higher, even if there is adequate rainfall. But we are not sure of Rogers' suggestion that investors should hoard agri commodity derivatives in their investment portfolio. For we believe that speculative trends could only worsen the problem of rising food prices.

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