Agflation- What is it?

Agflation, is a relatively new term coined by analysts at Merrill Lynch in 2007. Back then rising demand for agricultural products started driving up prices. Agflation is simply a combining of the words agriculture as in “agricultural commodities” and the word inflation. Inflation is commonly used to mean an increase in prices (although it originally meant an increase in the money supply which eventually resulted in an increase in prices). So agflation is simply an increase in the prices of agricultural products.

But agflation is not the result of an increase in the money supply like typical inflation, but rather it is simply a result of supply and demand factors. In 2000, the world wide population was 6,057,000,000 and by the end of 2010 it had increased to 6,900,000,000 or an increase of 843 million. With 843 million more mouths to feed you would expect food prices to increase but during the first five years (through 2005) that had not happened.

In the year 2000, the Economist magazine’s Commodity Price Index of global food prices was set to equal 100. Five years later the index stood at slightly under 100 a net change over five years of zero (actually a slight decline). As the world population increases the long-term demand for food supplies also increases but as long as the supply of food increases proportionally the price can be expected to remain relatively level as this example shows.

Global Food Prices 2005-2011

So what happened since 2005 to drive the price of food up 135% over the following five years? [Read more...]