The Coming Crisis of Renewed Soaring Food Prices

By Martin Khor
Triple Crises, February 14, 2011
Straight to the Source

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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.