Why Food Costs Are Climbing
- From: periodistalibre@xxxxxxx
- Date: Sun, 13 Apr 2008 20:41:38 -0700 (PDT)
As food prices surge, starvation looms for millions. Experts call for
emergency action but admit there's no quick fix
By Eric Reguly
12/04/08 "Globe and Mail" -- -ROME -- Fatal food riots in Haiti.
Violent food-price protests in Egypt and Ivory Coast. Rice so valuable
it is transported in armoured convoys. Soldiers guarding fields and
warehouses. Export bans to keep local populations from starving.
For the first time in decades, the spectre of widespread hunger for
millions looms as food prices explode. Two words not in common
currency in recent years -- famine and starvation -- are now being
raised as distinct possibilities in the poorest, food-importing
countries.
Unlike past food crises, solved largely by throwing aid at hungry
stomachs and boosting agricultural productivity, this one won't go
away quickly, experts say. Prices are soaring and stand every chance
of staying high because this crisis is different.
A swelling global population, soaring energy prices, the clamouring
for meat from the rising Asian middle class, competition from biofuels
and hot money pouring into the commodity markets are all factors that
make this crisis unique and potentially calamitous. Even with
concerted global action, such as rushing more land into cultivation,
it will take years to fix the problem.
The price increases and food shortages have been nothing short of
shocking. In February, stockpiles of wheat hit a 60-year low in the
United States as prices soared. Almost all other commodities, from
rice and soybeans to sugar and corn, have posted triple-digit price
increases in the past year or two.
Yesterday in Rome, Jacques Diouf, director-general of the United
Nations Food and Agriculture Organization, said the cereal-import bill
for the poorest countries is expected to rise 56 per cent this year,
on top of the 37 per cent recorded last year. "There is certainly a
risk of [people] dying of starvation" unless urgent action is taken,
he said. "I am surprised I have not been summoned to the Security
Council to discuss these issues."
The UN's donor countries, he said, need to come up with as much as
$1.7-billion (U.S.) to implement quick-fix food programs, such as
topping up the World Food Programme, whose emergency food-buying power
has been clobbered by the rising prices. Its budget shortfall, the
difference between the food it intended to buy and can now afford, is
$500-million.
Other UN officials have been equally blunt. Sir John Holmes, the UN's
top humanitarian official and emergency relief co-ordinator, said this
week that soaring food prices threaten political stability. The UN and
national governments are especially worried about potentially violent
situations in Africa's increasingly crowded urban areas. Rioting
triggered by absent or unaffordable food could cripple cities. "The
security implications should not be underestimated as food riots are
being reported across the globe," Mr. Holmes said.
Nigeria's Kanayo Nwanze, vice-president of the UN's International Fund
for Agricultural Development, sees no short-term fix. "I wouldn't be
surprised if there is an escalation of food riots in the next few
months," he said. "It could lead to famine in certain parts of Africa
if the international community and local governments do not put
emergency actions into place."
And it's not just the UN that thinks so. Independent analysts,
economists and agriculture consultants say the term most often used to
describe the food prices and shortages -- crisis -- is not hyperbole.
How did it come to this? Surging food prices, now at 30-year highs,
are actually a relatively new phenomenon. In the mid-1970s, prices
began to fall as the green revolution around the world made farms
dramatically more productive, thanks to improvements in irrigation and
the widespread use of fertilizers, mechanized farm equipment and
genetically engineered crops. If there was a crisis, it was food
surpluses -- too much food chasing too few stomachs -- and dropping
produce prices had often disastrous effects on farm incomes.
By 2001, the surpluses began to shrink and prices reversed. In the
past year or so, the price curve has gone nearly vertical. The UN's
food index rose 45 per cent in the past nine months alone, but some
prices have climbed even faster. Wheat went up 108 per cent in the
past 12 months; corn rose 66 per cent. Rice, the food that feeds half
the world, went "from a staple to a delicacy," says Standard Chartered
Bank food commodities analyst Abah Ofon.
The price of Thai medium-quality rice, a global benchmark, has more
than doubled since the end of 2007. This week it reached a record $854
a tonne, which helps explain why World Food Programme trucks carrying
rice in certain parts of Africa have come under attack.
Food prices in the first three months of 2008 reached their highest
level in both nominal and real (inflation adjusted) terms in almost 30
years, the UN says. That's stoking double-digit inflation and
prompting countries such as Egypt, Vietnam and India to eliminate or
substantially reduce rice exports to keep a lid on prices and prevent
rioting. But, by reducing global supply, this only increases prices
for food-importing countries, many of them in West Africa.
Throughout history, the world has seen food shortages and famines
triggered by drought, war, pestilence, crop failures and regional
overpopulation. In the Chinese famine between 1958 and 1961, an
estimated 30 million people died from malnutrition. In the late 1960s
and early 1970s, severe food shortages hit India and parts of
southeast Asia. Only the emergency shipment of hundreds of thousands
of tonnes of grain from the U.S. prevented a humanitarian disaster.
Drought, violent conflict, economic incompetence, misfortune and
corruption created deadly famines in Ethiopia and Sudan in the first
half of the 1980s.
In each case, the food shortages were alleviated through emergency aid
or investment in farming and crop productivity. While no one so far is
dying of hunger in this latest crisis, the UN and agriculture experts
predict years of pain, at best, and severe shortages, possibly famine
in the worst-hit countries. The reason: High prices are likely to
persist for years.
Swelling population explains only part of the problem. The world's
population, estimated at 6.6 billion, has doubled since 1965. But
population growth rates are falling and, theoretically, there is
enough food to feed everyone on the planet, said Peter Hazell, a
British agriculture economist and a former World Bank principal
economist.
Why millions may go hungry, he said, is because prices are so high,
food is becoming unaffordable in some parts of the world.
The "rural poor" (to use the UN's term) in Burkina Faso, Niger,
Somalia, Senegal, Cameroon and some other African countries exist on
the equivalent of $1 a day or less. As much as 70 per cent of that
meagre income goes to food purchases, compared with about 15 per cent
in the U.S. and Canada. As prices, but not incomes, rise, the point
may be reached where food portions shrink or meals are skipped.
Malnutrition sets in.
The dramatic price rises have been driven by factors absent in
previous food shortages.
They include turning food into fuel, climate change, high oil and
natural gas prices (which boost trucking and fertilizer costs),
greater consumption of meat and dairy products as incomes rise (which
raises the demand for animal feedstuffs), and investment funds, whose
billions of dollars of firepower can magnify price increases.
Driven by fears of global warming, biofuel has become big business in
the U.S., Canada and the European Union. The incentive to produce the
fuels is overwhelming because they are subsidized by taxpayers and,
depending on the country or the region, come with content mandates.
Starting next week, Britain will require gasoline and diesel sold at
the pumps be mixed with 2.5-per-cent biofuel, rising to 5.75 per cent
by 2010 and 10 per cent by 2020, in line with European Union
directives. Ontario's ethanol-content mandate is 5 per cent. As the
content requirements rise, more and more land is devoted to growing
crops for fuel, such as corn-based ethanol. In the EU alone, 15 per
cent of the arable land is expected to be devoured by biofuel
production by 2020.
That's raising alarm bells, especially given lingering doubts about
the effectiveness of ethanol in combatting climate change. British
Prime Minister Gordon Brown said this week he's worried that ethanol
production is pushing up food prices everywhere, and he called for an
urgent review of the issue. Economist Dr. Hazell has said that filling
an SUV tank once with ethanol consumes more maize than the typical
African eats in a year.
Rising ethanol demand is one of the main reasons why Wall Street
securities firm Goldman Sachs predicts high food prices for a long
time. "We believe the recent rise in agriculture prices is not a
transient spike, but rather represents the beginning of a structural
increase in prices, much as has occurred in the energy and metals
markets," Jeffrey Currie, Goldman's chief commodities analyst, said in
a research note last month.
Severe weather has clobbered crop production among some big exporting
countries. Drought in Australia, the third largest wheat exporter
after the U.S. and Canada, has pushed wheat production down by half
since the 2005-06 crop year. Statistics Canada said Canadian wheat
production fell 20.6 per last year. Exports, as a result, are expected
to fall by six million tonnes in the 2007-08 year.
While Australia and Canada could bounce back in the next season or the
season after, depending on temperatures and rainfall, rising global
temperatures do not bode well for agriculture in many parts of the
world.
The UN has predicted that climate change could reduce production in
developing countries by 9 to 21 per cent by 2080 and that sub-Saharan
Africa could lose more than 30 per cent of its main crop, maize.
Southern Asia, it said, could see millet, maize and rice production
fall by 10 per cent. The challenge is to offset the losses with higher
crop yields on arable land less affected by climate change.
Mr. Ofon, of Standard Chartered Bank, said rising demand in the face
of production shortfalls does not fully explain the dramatic price
increases. Investors are the other driver. They have discovered they
can make money from food commodities as easily as they can in oil,
gold or nickel. "Fund money flowing into agriculture has boosted
prices," he said. "It's fashionable. This is the year of agricultural
commodities."
But Mr. Currie of Goldman Sachs dismisses the theory that funds are
pushing prices higher than they would be otherwise, though the funds
can make prices rise and fall quickly in the short term. "The simple
truth is that the funds don't take delivery of the commodity," he said
in an interview. "Therefore they cannot sit on them and put them in
silos. Therefore they can't affect prices over the long term."
In other words, the rally in food prices is being caused by demand
exceeding production, resulting in dwindling food stockpiles. UN's
International Fund for Agricultural Development, for one, assumes
prices will stay high for as long as 10 years.
Agriculture economists and the UN have not lost all hope. New
irrigation systems are inevitable in Africa and have the potential to
boost crop production dramatically. Ditto for the use of fertilizers.
Only three to five kilos of fertilizer per hectare is used in Africa,
compared with about 250 kilos in the U.S. The problem with using more
fertilizer is cost. Fertilizers such as urea are derived from natural
gas, and gas prices have climbed, too. The price of urea has almost
tripled since 2003, to $400 a tonne.
Dr. Hazell said some big countries, notably the U.S., Canada and
Ukraine, have the capacity to increase crop production substantially.
Already world cereal production is on the rise, although not nearly
fast enough to end the crisis. The Food and Agriculture Organization
yesterday forecast a 2.6-per-cent rise in cereal production in 2008.
Cutting back on ethanol production alone would go some way to
restoring supply-demand balance in the food markets. "If we decide to
do something about it, we can just use less food for fuel," he said.
But everyone -- analysts, economists, agriculture experts, the UN --
thinks all bets are off in the next two or three years. It's almost
impossible to boost production quickly, because of land and water
shortages and competition from biofuels.
"I can say with some degree of confidence that if governments and
international development agencies do not put in place a concerted
effort quickly, then we are looking at a very serious problem," Mr.
Nwanze said.
.
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