Archive for January, 2011

Why are food prices soaring again?

Only six months ago, the world appeared to have put the destabilising food price spikes of 2008 behind it. Wealthy countries had clubbed together to deliver new seeds and fertiliser to African farmers, global harvests proved bountiful in 2009, and food stockpiles – which everyone had been surprised to find empty in 2008 – were gradually built up again.

But this week the world was jolted into submission when food riots erupted in Algeria, reminiscent of the violent unrest of 2008 in Cameroon, Egypt, Somalia, Haiti and elsewhere across the developing world. Six months ago food prices once more entered a steep upward trajectory, and by December 2010 they had breached even the June 2008 levels, setting alarm bells ringing at the UN.

Algeria first, where next?

Will the crisis be contained to Algeria? There are reasons to fear that it is only the tip of the iceberg. Food price increases are always more sharply felt in lower income countries, where food consumption takes up a higher percentage of household spending. Worryingly, Algeria is not even particularly poor by global standards. However, its reliance on food imports is matched only by Senegal, Yemen, Eritrea, Haiti and North Korea. When major suppliers into the world market suffer harvest failures and prices surge on international markets, major importers feel the pinch.

According to a 2008 World Bank report, only a handful of developing countries are at genuine risk of being destabilised by a repeat of global price spikes. Most agricultural trade deficits have been whittled down over recent decades, and for the remaining sub-Saharan food importers, “small changes in their agricultural production mix will generate enough food for their citizens and can turn most of them into net raw food exporters.” However, this sounds complacent when it is considered that in many cases a major deficit in core cereal crops remains, covered by a surplus in cash crops such as nuts or strawberries – a structural imbalance which cannot be remedied overnight.

With this in mind, it is not only the major net food importers like Algeria who are at risk; there are in fact a host of countries with the lethal combination of low, food-dominated incomes, and reliance on imports of key foodstuffs such as wheat, maize and sugar; with the prices of these commodities doubling from one year to the next, and producing a knock-on effect on meat and dairy prices, even small trade deficits can translate into destabilising price hikes.

Bad weather – nothing new

The trigger has once again been bad harvests: Russian and Argentine droughts have combined with Australian floods to depress global yields below expectations.

But bad weather is nothing new – even if climate change is making a structural problem structurally worse. What is new is the capacity for bad harvests to spark seismic price movements on global commodity exchanges, and for social unrest to erupt in poor countries as the price hikes filter through into day-to-day products.

As the second food crisis in two years comes into view, it is fair to question whether efforts to counter this huge emerging problem have been given the necessary urgency.

Speculators, stocks and silver linings

Many said that speculators were to blame last time round, and a series of reports and reviews were rolled out to shed light on shady practices in agricultural derivatives markets. However, if Nicolas Sarkozy’s rhetoric is anything to go by, these moves have gone nowhere near far enough. The French President has made the fight against commodity price volatility and market speculators one of the top priorities of this year’s French presidency of the G8 and G20.

What about food stocks? In the heady days of 2008, the idea of building up ‘global’ food stocks under integrated management gained momentum. But the idea was riddled by practical pitfalls, and soon petered out. In the meantime countries did start to build their individual stocks back up, but the next supply crisis appears to have hit too soon; the EU has spent much of the autumn whittling down its modest stocks of barley, wheat, butter and milk powder in a bid to keep domestic price increases in check.

Is oil to blame? Higher crude prices drive up the cost of agricultural inputs such as fertiliser, with knock-on effects on food. EU and global experts have identified clear correlations here. But can anything be done as crude climbs structurally higher? Biofuels, another scapegoat of 2008, could continue their current expansion and eventually take on a major share of the transport fuel blend. However, diverting extra hectares of sugar, rapeseed and palm oil to agrifuels could, perversely, drive food prices up even as oil comes back down.

Investing in less contentious forms of renewable energy looks like a simple win-win for food security in the long term: fighting climate change and its unpredictable impacts on harvests with one hand, and bringing down the price of oil (and its repercussions on food prices) with the other.

However, the 2008 food crisis failed to spark effective short term strategies to rein in price volatility, and it also failed to inject the urgency into the climate change debate which is desperately needed for the longer term.

Should a second fully-fledged food crisis materialise, it could at least provide further intelligence on the core problems, and how to go about resolving them. Evidently, supply and demand are not meeting each other, or the signals are not being transmitted well enough. Either way, the precedent is worrying, given that the demand side will soon swell to 9 billion. Producing the right amount of food and having it reach people at the right prices is proving a big enough challenge with current production capacity.

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