INSIGHT: Global food prices a trigger for turmoil

24 March 2011 18:05  [Source: ICIS news]

By Frank Zaworski

Drought hit wheat growing areas in 2010Global food prices that touched record highs in February have been cited by the UN and others as a major contributor to the social turmoil and political unrest in North Africa and the Middle East.

In many troubled countries, rising food prices triggered dissatisfaction with long-embedded leaderships in countries such as Tunisia, Egypt and Libya. Once ignited, populations there threw authoritarian rule, joblessness and other concerns onto the bonfires of revolution.

Rising food prices have driven an estimated 44m people into poverty in developing countries since last June, the World Bank Group said ahead of the March G20 meeting of finance ministers and central bank governors in Paris.

A steady rise in food prices was ignited in mid-2010 by dry weather in the key wheat-growing areas of eastern Europe and Asia. Russia suffered its worst drought in 100 years. The droughts came on the heels of disappointing harvests in Australia and South America caused by heavy rains and flooding.

Russia announced last August that it would halt all exports of wheat, further tightening world supplies of this major food crop. At the end of February, Russia said it was considering extending the ban on exports. Egypt had been a major importer of Russian wheat.

In the second half of 2010, prices of wheat and corn climbed by more than 70%, and prices for rice and oilseeds followed suit, according to data from the UN's Food and Agriculture Organization (FAO).

The World Bank said its food price index increased by 17% between August and November last year, just 11% below what it was during the peak of the global food price crisis in June 2008.

In addition to rising grain and oilseed prices, sugar is at a 30-year high because of poor harvests in Brazil and India.

In the food-rich US, the Labor Department said food prices rose 3.9% in February, the biggest gain in 37 years. The increase was largely blamed on a 50% increase in the cost of vegetables.

Elevated food prices are most harmful to poor countries such as Mali, Sudan and Yemen, where people spend as much as half their income on food.

In many countries, consumers are insulated from the rise in global food prices through government subsidies on basic staples such as wheat, the World Bank said in a recent report.

Yemen is particularly vulnerable, the World Bank said, as it relies on imports to meet 82% of its wheat consumption and has wheat stocks equivalent to less than a month of its average monthly consumption.

A 50% increase in the wheat price would translate into an estimated increase in the import bill of nearly 1% of Yemeni GDP, or more than 20% of its foreign reserves, the World Bank said.

According to the FAO, the global community currently diverts more than 100m tonnes of cereal grains from the food chain to biofuels such as ethanol and biodiesel.

On 8 March, however, the FAO said that it was rising crude oil prices that are driving up food costs globally.

"Unexpected oil price spikes could further exacerbate an already precarious situation in food markets," said FAO director of trade and markets David Hallam.

"The last time we saw food price inflation like we are seeing today, oil was peaking at $147/bbl," said Bliss Baker of the Global Renewable Fuels Alliance.

However, there is more behind the rapid rise in food prices than grains being used for biofuels and bad weather. The remarkable surge in China's economy and the burgeoning economies of other emerging nations have prompted a desire for more varied diets. And a growing hunger for meat protein means more grain is fed to livestock, with less available for the baking of bread.

While bigger and better crops in 2011 will improve global food stocks, the FAO said it expects to see more food price volatility ahead as oil prices react to geopolitical events.

International commodity prices are anticipated to average higher in the next decade, compared with the decade before the price spike of 2007–2008, the FAO said in a March Agricultural Outlook developed in conjunction with the OECD.

Their forecast is based, above all, on the resumption of economic growth in developing countries, higher demand for grains from rising biofuels production, and anticipated higher costs of energy-related farming inputs, the FAO and OECD said.

“Agriculture markets have always been volatile, but if governments act together then extreme price swings can be mitigated, and vulnerable consumers and producers better protected," said OECD Secretary-General Angel Gurría.

By: Frank Zaworski
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