The nasty word “inflation” is starting to be heard in more press reports than it has in a long, long time. Oil was the original culprit that nudged inflation onto to the world’s stage; but, increasingly, rising food prices are grabbing the headlines. I first wrote on this topic in January in a post entitled Search for Oil Alternatives Pushes Food Prices Higher. Last year food prices in the United States rose 4 percent and they are predicted to rise at least that much this year. Those are mild increases, however, in comparison to global prices. As I reported in the just mentioned post, “The food price index of the Food and Agriculture Organization of the United Nations, based on export prices for 60 internationally traded foodstuffs, climbed 37 percent last year. That was on top of a 14 percent increase in 2006, and the trend has accelerated this winter.” Even in an affluent nation like the United States, rising food prices have a negative impact — especially on the poor. There are several factors that have converged to create the conditions that are driving food prices up. First, of course, is the price of oil. Since large-scale agricultural businesses rely on machinery to plant, nurture, and harvest crops, higher oil prices means that it costs more to produce food. High oil prices also increase the cost of getting food to market. Second, there have been a number of climate-related events that have reduced food supplies. Finally, the increased interest in biofuels has caused many farmers to turn food crops into fuel crops. Rising food prices have caused protests around the world. Recently a person was killed during such a protest in the Ivory Coast. One thing that this emerging crisis has demonstrated is how interconnected the world now is. Take, for example, the drought in Australia that has created a global shortage of rice [“A Drought in Australia, a Global Shortage of Rice,” by Keith Bradsher, New York Times, 17 April 2008].
“Ten thousand miles separate the [Deniliquin Australia rice] mill’s the hushed rows of oversized silos and sheds — beige, gray and now empty — from the riotous streets of Port-au-Prince, Haiti, but a widening global crisis unites them. The collapse of Australia’s rice production is one of several factors contributing to a doubling of rice prices in the last three months — increases that have led the world’s largest exporters to restrict exports severely, spurred panicked hoarding in Hong Kong and the Philippines, and set off violent protests in countries including Cameroon, Egypt, Ethiopia, Haiti, Indonesia, Italy, Ivory Coast, Mauritania, the Philippines, Thailand, Uzbekistan and Yemen.”
Bradsher reports that climate change is not the only factor affecting a decrease in Australia’s rice production. Many farmers, he notes, are turning from cultivating rice paddies to cultivating vineyards for the production of Australian wine or selling their water rights to vintners (which means they can’t grow rice). This combination of factors has been devastating to the world’s rice prices. As I noted in my earlier post, other policy decisions have also had tremendous impact. Andrew Martin of the New York Times reports that these decisions are coming under increased criticism [“Fuel Choices, Food Crises and Finger-Pointing,” 15 April 2008].
“The idea of turning farms into fuel plants seemed, for a time, like one of the answers to high global oil prices and supply worries. That strategy seemed to reach a high point last year when Congress mandated a fivefold increase in the use of biofuels. But now a reaction is building against policies in the United States and Europe to promote ethanol and similar fuels, with political leaders from poor countries contending that these fuels are driving up food prices and starving poor people. Biofuels are fast becoming a new flash point in global diplomacy, putting pressure on Western politicians to reconsider their policies, even as they argue that biofuels are only one factor in the seemingly inexorable rise in food prices.”
Washington Post columnist David Ignatius recently wrote about the rice crisis, rising food prices, and inflation in other commodity prices and how they are likely to ignite political unrest and instability [“Perils in the Price of Rice,” 3 April 2008].
“The new danger is global inflation — most worryingly in food prices, but also in prices for commodities, raw materials and products that require petroleum energy, which includes almost everything. Prices for these goods have been skyrocketing in international markets — at the same time the Federal Reserve and other central banks have been hosing the world with new money in their efforts to avoid a financial crisis. That’s an explosive mixture. It risks a kind of inflation that would trigger panic buying, hoarding and fears of mass political protest. Actually, this is already happening in Asia, according to the [New York] Times. The price of rice in global markets has nearly doubled in the last three months, reports the [New York] Times’s Keith Bradsher. Fearing shortages, some major rice producers — including Vietnam, India, Egypt and Cambodia — have sharply limited their rice exports so they can be sure they can feed their own people. Bradsher summarizes the evidence that food shortages and inflation are fueling political unrest: ‘Since January, thousands of troops have been deployed in Pakistan to guard trucks carrying wheat and flour. Protests have erupted in Indonesia over soybean shortages, and China has put price controls on cooking oil, grain, meat, milk and eggs. Food riots have erupted in recent months in Guinea, Mauritania, Mexico, Morocco, Senegal, Uzbekistan and Yemen.’ World Bank President Robert Zoelick rang the alarm bell in a [recent] speech. … He noted that since 2005, the prices of staples have risen 80 percent. The real price of rice rose to a 19-year high last month, he said, while the real price of wheat hit a 28-year high.”
According to Ignatius, Zoelick indicated that 33 countries face potential political and social unrest because of the skyrocketing prices of food and energy. One of those countries is North Korea — a country that tends to be a perpetual thorn in the side of the international community [“Huge Gap Predicted In Supply Of Food,” by Blaine Harden, Washington Post, 17 April 2008].
“North Korea is facing a humanitarian crisis this year and will likely need large food donations from the international community, the U.N. World Food Program said Wednesday. ‘Major sources of food for North Korea are all going down, and there is no very good prospect that any will go up soon,’ said Tony Banbury, the agency’s regional director for Asia. This year’s food shortfall is projected to be 1.66 million metric tons, about double the need of last year and the highest since 2001, according to the U.N. Food and Agriculture Organization. The fast-worsening situation in the closed communist country — where prices for staples have doubled in the past year — is the result of what U.N. officials describe as a pernicious confluence of flood-damaged local harvests, soaring world food prices and an unexpectedly sharp drop in aid from neighboring South Korea and China. International donors that in the past have provided food through the United Nations have not been lined up this year. In large measure, that is because the North announced in 2006 that it would not want or need large amounts of food aid.”
Returning to Bradsher’s article about the drought in Australia, he concludes:
“The global agricultural crisis is threatening to become political, pitting the United States and other developed countries against the developing world over the need for affordable food versus the need for renewable energy. Many poorer nations worry that subsidies from rich countries to support biofuels, which turn food, like corn, into fuel, are pushing up the price of staples. The World Bank and the United Nations Educational, Scientific and Cultural Organization called on major agricultural nations to overhaul policies to avoid a social explosion from rising food prices.”
The global economy hates both inflation and unrest — they make a toxic combination. When inflation affects food prices, it creates a worst case scenario. Governments, of course, can’t control climate change in the near-term, but they need to ensure that other resilient strategies are pursued to protect the global food chain and keep inflation in check.