The coming crisis of renewed soaring food prices

Martin Khor

The events in Egypt that incredibly propelled President Mubarak out of power after 18 days of protests have surprised everyone, probably Egyptians too.

The main reason for the protests was political, the yearning of the people for the ending of repression and for a new era of democracy. But part of the anger of the people, especially the young, arose from serious economic and social problems. Poverty has been growing in recent years, affecting one in four people. Unemployment jumped to 10% while the rate was one-third for young men.

And then there are the increasing prices of food.  Food accounts for almost half the average Egyptian household expenditure. In 2008 there were riots in Egypt over the rising price of bread, which was part of the dramatic global food price inflation in that year.  The global recession ended that round of inflation, but in recent months the prices of foods and other commodities have been jumping up again.

The protests in Egypt and elsewhere in the Middle East were partly fuelled by food prices, according to the World Food Programme.  “In many of the protests, demonstrators have brandished loaves of bread or displayed banners expressing anger about the rising cost of food staples such as lentils,” said its executive director Josette Sheeran.

As food prices are soaring around the world, the potential for social unrest is also increasing.

In January, the global price index of food items rose to its highest recorded level, according to the Food and Agriculture Organization.  The index increased for the seventh month running, up by 3.4% from December 2010.

The cereal price index was 3% above December and at the highest level since July 2008, though still 11% below its peak in April 2008.  The oils and fats index rose by 5.6%, nearing the June 2008 record level.  The dairy price index shot up 6.2% and the sugar price index by 5.4%.

There are several reasons for this recent round of food price inflation, as I found out at the Global Commodities Forum at UNCTAD in Geneva in early February.

First are the weather and other factors that affected supplies of some crops.  For example, wheat production was severely affected by the drought in Russia, and the current drought in China has also reduced wheat output significantly.  Wheat prices have shot up: the benchmark US price in January was 59% above a year ago.

Maize production is forecast to fall this year in Argentina, and that has affected the maize price.  The steep price increases in coffee in the past three years are due mainly to reduction in crop production in Colombia, according to a senior official of the International Coffee Organization.

Second is the competition for land to produce certain crops that are used both for food and for bio-fuels.  In the United States, maize and soyabeans are produced to make ethanol, and this contributed to rising prices of the two products used as food, according to the executive director of the International Grains Council.

Third is the increased use of commodity markets for investment and speculation, as investors and speculative funds take advantage of low interest rates and excess liquidity in developed countries and of the commodity markets as arenas for manipulation and quick profits, as recent postings by Timothy Wise (and another) and Jayati Ghosh have argued.

The extent to which speculation is a cause of rising commodity prices has been a matter of intense debate, and the situation may vary from commodity to commodity.

According to a senior official of the International Sugar Organization, the recent soaring of sugar prices (now at a 30-year high) is due to fundamentals, “but the financialization of commodity markets magnified the price surges.”

As for oil, the Saudi Arabian petroleum minister was very clear that the volatile swings in the oil price (now at over $100 a barrel) are due to speculation in the oil market.

Prices of commodities across the board (not just food) are rising. The Economist magazine’s commodity-price dollar index for all commodities on 1 February was 6.2% higher than a month earlier and 49.7% above a year ago.  The index for food items was 45% above a year ago.

FAO data give details of the soaring food prices in Asia. In China, national benchmark prices of rice and wheat in January were 20% and 16% above their year-ago levels respectively.

In Bangladesh, prices of rice reached a new record high in January, 33% higher than a year ago and imported wheat was 34% higher.

In Indonesia, rice prices also reached new record levels. In December 2010 the national average rice price was 31% above a year earlier.

And in India, prices of rice and wheat remained high in January, after increasing during 2010.  Prices of onions skyrocketed due to rain and damaged crops and by January were double the level of June 2010. Onion exports have been banned and import duties on onions have been removed.  Potato and tomato crops have also been affected and their prices have shown marked increases.

In the near future the food situation (prices and supplies) is likely to worsen.  While emergency measures in the short run can be expected in affected developing countries, especially those that are net food importers, what is urgently needed in the longer run is for developing countries to boost local food production.

“Importing cheap food” cannot be the prescription for food security, a policy the international financial institutions have advocated for years.  Not when global food prices have been shooting up and when supplies of foods in the global markets are sometimes uncertain.  When food output is reduced significantly due to the weather or other factors, countries can be expected to ensure that their own populations are fed first.

One Response to “The coming crisis of renewed soaring food prices”

  1. Martin Khor’s sweep of the movement in indices and the reasons for their movement is most useful. This post helps fix the global nature of the price+supply problem with food staples.

    I would like to point to several adjacent factors which Triple Crisis readers, and contributors, may give some thought to:

    1. Take any administrative unit which is cultivating. This may be a district or a county, but it needs to be a component of a state/province so that the trend is understood. Especially if this district is in South Asia, South-East Asia or South America, it will have lost, over the last 20 years people to cities. Some of these people will have been cultivators. Now they will be wage labourers, or will hold informal jobs in urban centres. Whatever their setting, they are no longer cultivators.

    2. The size and sprawl of non-metro cities in these same regions has increased. That spatial growth has taken over land. field experience tells me that if an acre of field is lost to urban expansion, within a 3-5 year period 3 acres next to it will go fallow. The building of roads, depots, new residential colonies, small industries centres, community services and so on in new often unplanned suburbs contributes to the aggregate subtraction of field. This is taking place most conspicuously in urbanising centres with populations of 0.5 to 1 million. Multiply this impact by 100 such centres and we can see the scale of the impact on arable land.

    3. The change in the form and nature of the staple basket of household foods. We have been told by central planners for the last 30 years that traditional farmers’ markets and distribution systems are wasteful, that they lead to vegetables and fruit being wasted. (In South Asia, this was not ‘waste’ but simply went to animals as their food, went back into the biomass cycle.) Food processing and post-harvest technologies are designed to reduce this ‘waste’ and to ‘add value’. The addition of value comes at a cost to the consumer, whether rural or urban, and demands all the assurances of market and infrastructure that private sector requires before it makes investments to bring about ‘value addition’. All this adds up to increased household cost in real terms per 100kcal of available food.

    4. Quite apart from the demands of the biofuels sector, the steady increase in the processed foods sector in all developing countries has required a new, continuously growing pipe of raw material. This raw material is cereals, pulses, leafy vegetables, fruit, legumes, spices and herbs. For those countries with extensive public food distribution networks, it is a parallel channel, but one that is usually outside scrutiny. How large it is, how much is moved into the ‘supply chain’ (as it is now known) and what the ‘value addition’ is in terms of point of purchase cost to the consumer – these are some of the known unknowns of modern food flows that boost domestic price inflation.

    5. The commodity exchanges, we suspect, work at certain points along the procurement cycle and at certain points in this ‘value chain’. At those points, the effects of other unknowns are felt – such as the amount of cereal x which must be held secure in order for 30 day or 3 month trades to be fulfilled. Again, the patterns of infrastructure and logistics spending can help uncover some of these unknowns.

    We are always data deficit, at the smallest administrative level whose seasonal produce figures we would like to know, and along the flows of food. In my experience, for South Asia certainly, any number attributed to a state or province and which is public domain is probably a convenient guess and not even a best estimate – that is what industry has and we don’t.

    Regards, Rahul Goswami