It’s not just the credit crisis that has been keeping policymakers awake at night. A food crisis is sweeping the world like “a silent tsunami”, as Josette Sheeran of the World Food programme puts it, leaving widespread riots and rattled governments in its wake.
Food-price inflation has gathered pace of late, with wheat, corn, soybeans and rice all hitting records this year; rice prices have soared by 141% since January, with US futures gaining 17% last week alone. Between February 2005 and February 2008, food prices rose by an average of 83%, says the World Bank.
With food comprising around half of household consumption in some countries, civil strife is growing. Riots have broken out in at least a dozen countries – including Senegal, Mexico and Egypt, where the president has ordered the army to start baking bread; the Philippines has made rice hoarding punishable by life imprisonment; in Haiti, protests over rice prices have forced the resignation of the prime minister.
According to Rob Zoellick, president of the World Bank, food inflation could push at least 100 million people back into poverty (defined as earnings of $1 a day) and set back global progress against poverty by up to seven years.
Mounting wealth in developing countries has stimulated demand for food in general, and particularly meat and dairy products, which increases demand for grains to feed livestock. Soaring energy prices have increased demand for biofuels, which means more grains are devoted to ethanol. Almost all the expansion in global corn production from 2004 to 2007 was put towards American biofuels production, reckons the World Bank. Urbanisation has reduced agricultural land and agricultural productivity has made only modest progress over the past two decades. Stockpiles are at their lowest in 30 years.
Nor does it help matters that no fewer than 48 countries have imposed price controls, export restrictions or consumer subsidies, as The Economist notes. Such measures have distorted the price signals “that would otherwise have encouraged farmers to grow more food”. Meanwhile, investors heading for commodities as a hedge against inflation and dollar weakness have also underpinned prices; according to Christoph Eibl of Tiberius Asset management, $40bn flowed into raw materials markets in the first quarter of 2008 alone. The world now faces a “downward spiral of trade restrictions, higher prices for staples and starvation”, says the managing director of the IMF, Dominique Strauss-Kahn.
With China and other emerging countries now worried about food-induced inflation, they are raising interest rates, which is a “dangerous development” for a world economy relying on domestic demand in the emerging world, says Anatole Kaletsky in The Times. And as the Asian Development Bank points out, Asian government subsidies to cushion the impact of food-price rises is posing a threat to national budgets.
The ultimate answer to high food prices is to boost production, but that won’t happen if governments continue to prevent producers from receiving the right price, lowering incentives to boost production and keeping prices high, says Stephen King in The Independent. “For the emerging world, this has the potential to turn into an economic shock on a par with the oil price increases which hit the Western world in the 1970s.”