Fears Grow Concerning Possible Food Price Increases

Stephen DeAngelis

November 26, 2010

The Thanksgiving holiday in America is celebrated in November following the harvesting of crops and before the onset of winter. It seems like a good time to reflect on the global food situation. You might recall that back in 2007-2008 riots were spawned around the globe over food shortages and rising prices. A number of events colluded this year to create new concerns that food prices might once again begin soaring [“Fears grow over food supply,” by Javier Blas and Simon Mundy, Financial Times, 3 September 2010] Blas and Mundy note that these fears resulted in Russia extending its grain export ban and in wheat prices soaring. Riots have already started erupting in some places in Africa, They continue:

“[In September,] Russia announced a 12-month extension of its grain export ban, … raising fears about a return to the food shortages and riots of 2007-08 which spread through developing countries dependent on imports. The announcement by Vladimir Putin came as the United Nations’ Food and Agriculture Organisation called an emergency meeting to discuss the wheat shortage, and riots in Mozambique left seven dead. The unrest in Maputo, in which 280 people were also injured, followed the government’s decision to raise bread prices by 30 per cent. … Although agricultural officials and traders insist that wheat and other crop supplies are more abundant than in 2007-08, officials fear the deadly Mozambique riots could be replicated.”

As you might recall, severe drought and devastating wildfires took a toll on the Russian wheat crop earlier this year. Simon and Mundy remind us that “Russia is traditionally the world’s fourth-largest wheat exporter, and the export ban has already forced importers in the Middle East and North Africa, the biggest buyers, to seek supplies in Europe and the US.” The Financial Times prepared a nice interactive site [What’s driving the wheat price spike?] that lets you explore in more detail why wheat prices have risen so dramatically.

 

Continued increases in October pushed food prices closer to the levels seen in 2007-2008. As a result, the UN’s Food and Agriculture Organization’s (FAO) price index for “a basket of wheat, corn, rice, oilseeds, dairy products, sugar and meats” jumped nearly 5 percent over September prices. [“Food price rises stoke riot fears,” by Javier Blas, Financial Times, 2 November 2010] According to Abdolreza Abbassian, an FAO economist in Rome, “Prospects for improvements are very limited.” Blas reports that the FAO’s gloomy outlook marks a turnaround from its previous position. He explains:

“Until recently, the FAO had predicted that food prices would fall soon, but now officials are concerned that high costs could continue well into next year or even rise further. Wheat planting in the breadbasket region of the Black Sea is well below expectations, prompting forecasts of another low crop in 2011.”

In a follow-on article, Blas reported that “the bill for global food imports will top $1,000bn this year for the second time ever, putting the world ‘dangerously close’ to a new food crisis” [“Fears of new food crisis as prices soar,” Financial Times, 17 November 2010]. This “bill” represents a 15 percent rise over the bill for 2009. Blas continues:

“‘With the pressure on world prices of most commodities not abating, the international community must remain vigilant against further supply shocks in 2011,’ the FAO added. In the 10 years before the 2007-08 food crisis, the global bill for food imports averaged less than $500bn a year.”

Blas reports that rising food prices are not just affecting the developing world. McDonald’s and Kraft Foods have already announced that the cost of their products will rise next year. According to Greg Farrell, “At a time when the global consumer economy is still in the doldrums, a surge in the cost of wheat, milk, meat, cocoa and other staples of the world’s daily diet is increasing the pressure on manufacturers and retailers to pass the rises on to cash-strapped consumers across the US, Europe and parts of Asia” [“Consumers: Soon to feed through,” Financial Times, 6 August 2010]. He concludes:

“Overall, then, how much of the rise in input costs will feed its way through, and how soon? ‘Food companies have had success passing along commodity inflation in the past,’ says Judy Hong, a Goldman Sachs analyst. ‘It’s going to be more challenging to pass through commodity inflation to the consumer this time around. You have to look at it much more on a category and company basis. There are categories where the competitive pressure is more intense,’ she adds, pointing to cereals and soup as two. The pricing increases will eventually be passed along to shoppers, predicts Susan Anderson at Citigroup, but it will not happen quickly. ‘There will be a six-month lag instead of a one- to two-month lag,’ she says. If nothing else, that provides some reassurance for Christmas.”

The only person who doesn’t seem to be sounding the alarm is Tom Vilsack, U.S. Department of Agriculture Secretary [“Vilsack: Food Costs Won’t Surge,” by Brian Baskin, Wall Street Journal, 18 November 2010]. Baskin reports:

“Skyrocketing prices in the agricultural futures markets won’t translate into as big a bump in food costs for consumers, U.S. Department of Agriculture Secretary Tom Vilsack said on [17 November]. ‘I’m not sure that commodity prices necessarily translate directly and proportionately into food costs,’ Mr. Vilsack said in an interview, adding, ‘They go up and down all the time.’ … Farmers aren’t reaping the full benefit of higher prices, and consumers don’t pay the full cost, Mr. Vilsack said. ‘There are a lot of people in the food chain that are taking a bite out of the apple,’ he said. Food prices rose only 0.1% in October, the Labor Department said on Wednesday, even as corn futures shot up nearly 20% and sugar futures rose 15%. But large food producers, including General Mills Inc., have said recently that they will soon scale back promotions that have kept consumer prices subdued. The USDA estimates food prices this year will rise by between 0.5% and 1.5%, the smallest increase since 1992, although the rate is expected to pick up to a more normal 2% to 3% in 2011. Businesses across the agricultural sector also have low debt levels, making it easier to weather volatile markets, Mr. Vilsack said.”

Volatility in food prices is a subject that is likely to capture a lot of attention if a food crisis does emerge next year. A Financial Times editorial asserts, “A second food crisis in as many years is a wake-up call” [“The importance of global food security,” 5 September 2010]. It concludes:

“Focusing on food security is sensible. The link between food and political stability in the developing world is clear. The crisis of 2007-08 sparked widespread riots, bringing down governments in Haiti and Madagascar. [October’s] unrest in Mozambique was provoked by a sudden 30 per cent hike in the bread price. Things can be done. Most importantly, there is a need for greater investment in irrigation and other measures to improve land quality as well as crop resilience. Developed countries have focused too much on food aid rather than providing development assistance. The US, for instance, spends 20 times more on the former than the latter in Africa, according to a report last year from the Chicago Council on Global Affairs. This balance needs to change. Steps should be taken to mitigate the severity of crises when they strike. Bigger reserves will probably be needed, as will international rules to clear up the circumstances under which countries can suspend agricultural exports. This will take more than fine words.”

Joachim von Braun, director of the Center for Development Research at the University of Bonn and former director-general of the International Food Policy Research Institute, believes the time has come to regulate the agriculture sector [“Time to regulate volatile food markets,” Financial Times, 9 August 2010]. He writes:

“With the current extreme price increases for wheat, we are observing potentially the early stages of another global food-price crisis. Even if this does not evolve into something as dramatic as the crisis of 2007-08, when prices of major agricultural commodities from corn to rice shot up to record levels, triggering food riots from Bangladesh to Haiti, it is a stark indication of the perilous state of the world food market. Some lessons have been learned from 2008, but too little has been done to prevent future crises. In particular the malfunctioning of world grain markets has not been addressed – a failure now haunting world markets. The fixing of international food prices today is the result of three forces: expectations on future supply and demand; the growing role of speculators in commodity markets, and the importance of food prices for political stability in countries such as Egypt.”

Von Braun is concerned because he believes that “low-income countries and the poor are actually more vulnerable [today] than before the last food crisis.” He claims that the last food crisis “was in part the consequence of long-term neglect of investment in agriculture in developing countries and poorly thought-out agriculture subsidising policies in industrialised countries.” Add in a little bit of bad weather and lack of regulation and, he claims, you have the recipe for crisis. In a globalized world, he notes that it is impossible to isolate one market from another. “Not only are food and energy markets linked,” he writes, “but also food and financial markets have become intertwined.” He continues:

“A food price crisis is not of great significance for the relatively rich. But for the bottom 3bn it poses a nutrition disaster with appalling long-term health consequences. The number of undernourished people has increased against the backdrop of economic recession. The poor, however, do not take extreme price crises calmly any more, as the 2008 price spike revealed. … Policymakers have come to understand this tipping point and try to act long before it is reached. Now we must distinguish between necessary measures that should largely be the preserve of national governments and those best handled at the international level. The food price volatility must be addressed at a global level. It is essential to ensure open trade and transparent, appropriately regulated market institutions.”

Although von Braun also believes that “excessive speculation in food commodities should be curbed,” he believes that “simply excluding food from speculative futures markets would be wrong, as these activities also play a useful intelligence role.” He concludes:

“The improved functioning of markets must be accompanied by accelerated public investment in agriculture. China, India, Brazil and parts of Africa have done well on that score since the 2008 food crisis. Also, corporate and investment funds are paying more attention to crop land. Internationally co-ordinated policy must ensure these investments are sound and sustainable, which they currently are not. Spending on international agricultural research and development is among the most effective types of investment for promoting growth and reducing poverty. Current resources are not enough to work at the frontiers of new science. At the same time, international support for initiatives such as improving early childhood nutrition is needed in low-income countries. Finally, action is overdue to establish a global architecture for policies on agriculture and food. The current system lacks accountability, effectiveness and innovation.”

To get a better picture about the challenges associated with the feeding the world over the next four decades, read my series of reports on the future of agriculture and food security [Agriculture Old and NewAgriculture: The Bumpy Road Ahead; Agriculture Production and Prices; Feeding the World While Watching the Environment; The Gherkin and the Olive Tree; and Eating and the Environment].