Tag Archives: food crisis

What’s Driving Food Prices?

Women farmers on a sugar plantation in Mozambique.

Women farmers on a sugar plantation in Mozambique.

Global food prices continue to increase. According to the UN Food and Agriculture Organizasiton, global food prices reached the highest level on record in January, surpassing the mark previously set during the 2007-08 global food crisis. Last week, the European Union took the dramatic step of loosening longstanding import restrictions intended to protect European farmers from international competition. The move, which clearly hints that European markets are tighter than most observers believed, came on the heels of announcements by the US government that its corn harvest will likely be smaller than originally forecast. Meanwhile, international protests over higher food prices continue to rock governments around the world, most recently in Yemen.

What’s driving food prices higher? Obviously, production shortfalls and increasing demand in emerging economies are a part of the explanation. The diversion of food into ethanol fuel production, most notably for US corn production, is also an element.

But last week, Fed Chairman Ben Bernanke was forced on to the defensive. According to some critics, the decision of the US Federal Reserve to engage in a policy of quantitative easing, intended to increase the supply of money in the US economy in order to fuel economic growth, has driven investors into commodity markets, including food commodity markets, driving prices up. 

Although Bernanke strenuously denied the charges, the world’s top sugar traders last week echoed a similar concern. In a letter to the ICE Futures US exchange, the World Sugar Committee condemned “parasitic” computer traders who engage in high-frequency speculative trades which “only serve to enrich themselves at the expense of traditional market users.”  Sugar prices last week hit their highest levels in more than 30 years.

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Food Crises and Financial Speculation

Food Riots in Mozambique

Food Riots in Mozambique

There’s been much ado in the press recently about the emerging global food crisis. As global food commodity prices have increased over the past several months, governments have taken steps to address the price increasing, fueling greater response. The decision of the Russian government to limit wheat exports and the food riots in Mozambique garnered the greatest attention, leading the Financial Times last week to lead its online edition with an article entitled “Fears grow over global food supply.” 

Several of my favorite bloggers, including Chris BlattmanDuncan Green,  the Global Dashboard, and Raj Patel, have already chimed in on the topic. Perhaps the most interesting discussion was between Chris Blattman and Duncan Green, who offer competing perspectives on the two most important questions, namely: 1) Is there a food crisis today? and (2) What caused it?
 
 According to Blattman,

Globalization and growth should reduce price spikes in future. More countries are producing crops. Climate shocks in Argentina are not that tied to climate shocks in Russia or China, and so price volatility from supply shocks should be going down. Falling transport costs also mean that more substitutes are available, further reducing price volatility. So things should be getting better over time, not worse, especially if trade allows countries to diversify their diet. Envision a future of diminishing instability…

Are bread prices the proximate cause of the riots? Probably. Are they the root cause? Unlikely. Are global grain markets to blame? Unclear. How about bad domestic policy? Almost certainly. How about shallow and alarmist journalism about those poor, violent, unwashed nations? There are some things you can bet your life on.

Green counters, “This reminds me of the apocryphal French diplomat arguing in a Brussels punch-up ‘I can see it works in practice, but does it work in theory?’ Here’s the practice – you can clearly see food prices pretty smooth up til 2007, then going haywire.” Green offers the FAO Food Price Indices to support his position (see below).  

FAO Food Price Indices (2002-2004=100)

FAO Food Price Indices

But the real take away is that instability in global food prices is increasing. There’s also good reason to believe that speculative investment rather than real changes in demand is fueling the instability. Indeed, the dramatic price increases seen during the 2007 food crisis had very little to do with declining supply or increasing real demand.  Here, I think Blattman is fundamentally mistaken, price volatility will continue to increase not fall over time. Not a rosy picture.

Five Stories You Might Have Missed

The terrorist attacks in Mumbai, India’s financial center and most populous city, has dominated recent headlines.  The attacks claimed at least 192 lives and have the potential to undermine both Indian economic development and the warming of Indian-Pakistani relations. The political fallout is also likely to be steep.  Already, Shivraj Patil, India’s Home Minister, has resigned, and many are speculating that the attacks may cost India’s ruling Congress Party dearly at the polls.

Here are five other important stories from the past week:

1.  Barbara Hogan, the new Minister of Health in South Africa, has announced a new program to address the HIV/AIDS crisis.  Under the program, the South African government will expand its support for its anti-HIV program with the help of the British government.  South Africa has the highest rate of HIV inflection in the world; an estimated 1 out of every 8 Sought Africans is HIV positive.  But the administration of previous President Thabo Mbeki had refused to acknowledge the connection between HIV and AIDS, choosing to treat HIV with traditional healers rather than conventional medicine.  South African AIDS activists are celebrating the new program.

2.  Ethiopia has announced its intention to withdraw its troops from Somalia by the end of the year.  Ethiopia has maintained a force of 2,000 to 3,000 soldiers in Somalia since 2006, when it invaded in order to oust Islamic militants who had seized power.  But the interim government of Somalia has been unable to assert authority outside of a small region in the capital, and the African Union has not fully funded its peacekeeping operation in the country.  Somalia has become a failed state, home to piracy which threatens shipping through the Suez Canal.  Some have speculated that the announcement of the Ethiopian withdrawal is intended to put pressure on the United Nations to establish a new peacekeeping operation in Somalia.

3.  Flooding near the Port of Itajai, one of Brazil’s most important ports, threatens to undermine Brazil’s agricultural exports.  The River Itajai broke its banks, flooding the port and killing at least 100 people.  The flooding threatens to close the port for as long as two weeks, undermining exports from Santa Catarina state, a major exporter of meat and chicken.  The flooding could affect global food prices, potentially rekindling concerns of a global food crisis.

4.  A French program intended to address the global financial crisis has been blocked by European Union officials.  The European Commission, the bureaucracy of the European Union, has refused to permit France to proceed with its plan to recapitalize its banks through a $13.3 billion support package.  The French government has reacted angrily to the veto, calling the decision “stupid” and “ridiculous.”

5.  A European Union probe has concluded that pharmaceutical manufacturers have engaged in unfair practices intended to delay or block the release of generic drugsadding billions to the cost of healthcare.  The investigation involved raids on several of Europe’s leading drug producers leading some to believe that the EU may pursue criminal and civil cases against the largest offenders.