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Will Japan's Crisis Send Food Prices Even Higher?

One day after the Federal Reserve signaled it's not too worried about inflation comes news that wholesale food prices shot up nearly 4 percent in February, the biggest one-month rise in 36 years. That ensures that the steep food price increases we've already seen are about to get worse, not better. And a new wild card is the impact the earthquake and tsunami in Japan could have on the global food market.

Damage to land and infrastructure, as well as a compromised power supply, could cause Japan to rely on more food imports in the coming months and years, while also impacting its ability to maintain its major exports, including fish and its vaunted Kobe beef. All that could indeed put more upward pressure on global food prices, which were already spiking due to severe weather on just about every food-producing continent.

To be sure, there is little clarity yet on how this may all play out, as Japan's focus remains on its emergency relief efforts right now. But there are some dynamics already emerging that could impact the price we pay for food:

  • Japan already imports about 60 percent of its food. According to the USDA, Japan is the world's largest importer of food. In the coming weeks, it is expected that those imports may drop off as Japan's hobbled infrastructure -- two of its 12 major ports that handle commodities were destroyed -- and reduced power capacity will make it more difficult to process and transport imported food. (Japan is believed to have ample food stockpiles to handle its immediate needs.) But the decreased imports are seen as a temporary dip and eventually Japan may wind up needing to import more food.
  • Damaged land may require Japan to import more grains. An estimated 20 percent of Japan's domestic grain production comes from the northeast region of the country where the earthquake and tsunami hit. Grain is already Japan's largest agricultural import from the U.S (see the chart below from the USDA), and so that could pick up in the coming months. What's not clear is whether Japan would continue to import crops such as corn and wheat. It may instead temporarily switch to importing food that has already been processed -- say, cereal rather than wheat -- as its industrial energy capacity and transportation infrastructure rebuilds.

So far, the price of rice is not expected to be impacted. Japan has a vast supply of rice, and as long as farmers can get this year's crop planted in the coming spring season, it may be able to meet its internal demand for rice.

  • Demand for meat imports is less clear. Japan imports all of its pork and about 75 percent of its beef. What's not clear yet is whether a drop in restaurant dining and a more general move toward "basics" in Japan, at least in the short-term, might actually decrease the country's meat consumption.
  • Prices for sushi, Kobe beef, and other foods could go up. About one-third of Japan's annual seafood harvest is exported to the U.S. If the fishing industry has a hard time getting out of damaged ports and processing of premium fish hauls is hampered, that could send sushi prices higher in the coming months. Getting its prized Kobe beef to market could also be harder. Moreover, some southeast Asian countries have already begun testing Japanese food imports for radiation contamination, in response to concerns about emissions from the damaged Fukushima nuclear plant. So far, though, no country has announced any food import restrictions.
  • Speculators may make food the next commodity play. As evidenced by our latest wholesale food price report, the cost of food was already under plenty of pressure before the Japanese earthquake. Now that there's this potential added pressure on the global food supply, it raises the possibility that speculators may start paying even more attention to food. That would just make a trip to the grocery store even more painful.

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