US Federal Reserve Chairman Bernanke: Rising Grain Prices Aren’t Inflationary

Bernanke Grain InflationThere is no question that the world has a very tight supply of many agricultural commodities.  This is reflected in higher prices but it also is reflected in some of the hype behind almost every agricultural market commentary I hear these days.  When you mix the higher prices for food with some type of food riot in some far-off developing land it makes for great headlines.

It will surely be interesting to see how things play out.  Yes, 2011 has the potential to be very explosive for a lot of reasons.  We do have supply constraints in almost every agricultural commodity and a production shortfall this summer and fall will cause real angst. Aside from this, we have our fiscal and monetary situation bubbling away.  Remember QE2?  Regardless of all the emotion laden agricultural headlines, I still find the nuances inherent in US Federal Reserve chairman Ben Bernanke’s decisions quite intriguing.  What he is going to do next and what the Bank of Canada Gov. Mark Carney is going to do next will surely impact our bottom line by the end of 2011.

US Federal Reserve Chairman Ben Bernanke actually spoke last week in Washington DC to the National Press club.  Mr. Bernanke actually took questions today, something he doesn’t usually do because when the US Federal Reserve Chairman hiccups, everybody thinks that means something.  So it is always easier to keep quiet.

What Mr. Bernanke said was inflation was still not a big concern of his.  He said that inflation remains very low and he reiterated the fact that the Federal Reserve will continue to pump money into the economy.  QE2 was a response to an economy, which wasn’t growing, and the threat of deflation.  So with inflation still very low, he believes QE2 is working.  He also said that until unemployment numbers rise substantially, economic recovery still really hasn’t started.

He was asked if the Fed’s easy money policy had something to do with global food prices rising.  He was also asked this question in the context of it causing global instability.  I found it quite interesting Mr. Bernanke’s response.  He answered by saying rising prices for grain, rice and other food staples were a result of rapidly growing economies of developing nations.  He also mentioned that Egyptians for instance, buy food in their local currency, not the US dollar.  So he didn’t want to take any credit for his influence on the US dollar and food commodities.

I really took a lot of positives away from the Federal Reserve chairman’s comments.  He didn’t say anything about food versus fuel.  If he had it would have been a negative for agriculture.  It is true that what he said wasn’t particularly glowingly positive for the US economy but by disassociating him and US policy from rising food prices was a net positive for North American farmers.

What I find difficult to understand is how low inflation is in the United States.  Many of you at the different meetings that I have spoken at over the last few months have openly talked about the specter of inflation with so much government spending on both sides of our border.  Most of you have always explained this by saying we’ll need much higher interest rates to combat the inevitable inflation from too much money in the economy.  That all makes sense except it hasn’t happened and right now it doesn’t even look like it’s going to happen.  So maybe, gasp, maybe, the US Federal Reserve and the Bank of Canada know what they’re doing.

For Canadian producers, we’ve all had a collective pay raise through higher prices and a higher loonie.  In Ontario right now you can forward price corn over $5 bushels, wheat over $7 and soybeans over $12/bushel.   Combine those numbers with a Canadian dollar at $1.01 US and our buying power compared to our American cousins has rarely been as high.  This puts Canadian producers in the enviable situation of reducing debt significantly or expanding even more.  The risks inherent in that are entirely obvious if interest rates rise in the future to fight an inflation threat.

An acquaintance told me this week that it was an exciting time to be involved in Canadian agriculture.  Having written this column for the last 25 years, I must admit I’m not used to that statement.  In those 25 years I frankly have become much more used to hard times in agriculture.  So yes it’s true.  These are exciting agricultural times.  Add US Federal Reserve Chairman Bernanke and Bank of Canada Governor Mark Carney to the mix it get that much more intriguing.  For now, we’ll take it.  We’ve been down so many other wrong roads before.

Comments are closed.