Global Food Prices – Growing Concerns

The global food prices scenario, which has so far been driven largely by huge supply-demand mismatches, could further worsen as oil prices become highly volatile amidst raging unrest in the Arab world.

The world economy is going through hasty transformation in both economic and political ways led by a nasty shock from spiraling oil and food prices. Food prices have been continued to rise during the last two months, and now the spike in oil prices could push food costs even higher. The United Nation’s Food and Agriculture (FAO) food price index which measures the prices of basket of food commodities increased for the last eight months in a row. It is now at the highest level since it created in 1990. The volatile oil prices come against a backdrop of ever growing demand for food worldwide and increasingly tight supplies of major commodities.

Along with higher oil prices, the US government’s efforts to deal with global warming (incentives to grow bio-fuels instead of food crops) is inevitably driving up food prices. It seems a 1% increase in the prices of oil results in a 0.9% increase in the price of Maize, as every dollar increase in the price of oil increases the profitability of ethanol and hence bio-fuel demand for Maize. Since 2004, the production of Maize increased two-thirds of production to meet increased bio-fuel demand in the US. This has left very little choice to meet world’s growing need for food and animal feed. 

Food Inflation Contagion 

 

Source: FAO

Amidst growing conversion of bio-fuel corps and rising oil prices, the global food market is caught in a vicious circle. This is more so in the Middle East region. As rising oil prices drive up the cost of food which in turn triggers political unrest in oil-producing nations, which in turn pushes oil prices even higher, propelling food costs even higher. But so far, there seems to be no end in sight to this vicious circle.

On the other hand, the impact of global warming is further adding fuel to the fire. If we go by the growing frequency and intensity of severe incidents like the arduous drought last summer in Russia and Ukraine, the recent floods in Australia and the drought that gripped northern China, these appear to be steady climate change models. All these natural calamities occurred in major wheat-producing areas and thus in turn added to fears of inadequate grain supplies ahead and thus contributed further upward scale in food prices. 

Now, the skyrocketing food prices that erupted in Middle East and North Africa (MENA) are spreading beyond Arab nations. Rising food costs are already emerged as a source of spreading hunger and political unrest. Singapore-based Jim Rogers, Chairman, Rogers Holdings, foresees similar outburst in India and China, which would mainly be triggered by general inflation and food inflation. These developments would also result in political changes in both the economies and can have a short but massive impact on commodities. Rogers adds that “There will be lots of social unrest worldwide with governments and countries falling. Others will have crises before China – especially in the West Asia – perhaps even India.”

Is there a Way-out?

To feed rapidly growing population, enhancing agriculture output in the developing world is more urgent than ever. Robust economic growth in developing countries is also expanding strong middle classes and thus increasing demand for agriculture products. The global food market will need to increase food production by 70% to feed a global population of 9 billion by 2050. Therefore, it’s time nations should join together to pursue policies to control price volatility, while identifying helpless populations and responding aptly. To meet this mammoth task, the global economy need a rigorous effort by the private sector, governments and bilateral institutions to augment transparency and market information, increase agricultural productivity and facilitate trade.

Nevertheless, everything at the end hinges on oil prices. Governments must curtail consumption of petroleum and other related products to bring down the cost of food and fuel and thus slow the velocity of global warming. Beyond these things, the global policy makers must stop the practice of shoring up foreign oil autocrats.

Are they listening?