German groups focus on food prices

Specialists inside two of Germany’s largest financial groups have said pull-backs are to be expected after strong rises in food prices recently, but diverge on how sharp the falls will be.

Both DekaBank and Alianz’s fixed income specialist Pimco say pull-backs are not uncommon in agricultural markets after strong rallies such as the 58% seen over the past 12 months.

In a research note, chief economist at DekaBank Ulrich Kater, said coming harvests would bring “lasting relief” to prices, in the second half of 2011.

“It is only a matter of time before agricultural commodity prices fall again,” he said.

He added food prices generally would drop “quite strongly”, but this is not unusual to a market that not uncommonly suffered declines of 30% to 50%.

Mihir Worah, chief economist at Pimco, said by contrast rapid rises were likely to be followed by “modest pull-backs”.

He said a repeat of grains’ 80% jump last year was unlikely, but the ‘demand mean’ to which prices revert is a moving, rising target.

This is due to a “generational shift in global consumption patterns” fuelling a secular rise in commodity prices, Worah said.

The longer-term pattern, though derailed temporarily by recession in 2008, remains clear and prices will be higher by 2016, he added.

Both DekaBank and Pimco say adverse weather is primarily to blame for recent rises, though Deka’s Kater added non-industry traders were “magnifying price increases”.

Their analysis is somewhat at odds with US authorities, which are clamping down on speculative involvement in agricultural markets in a bid to dampen price volatility.

The Commodity Futures Trading Commission is proposing limiting spot month speculative positions for physical delivery and cash settled contracts for 28 futures contracts.

In explaining such limits generally, it says it may impose them “for the purpose of diminishing, eliminating, or preventing such problems”.

David Walker

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