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21/04/2008 | Food crisis

Oxford Analytica Staff

Since 2005, the rise (in real terms) in the price of almost every food item has revived fears of a return to global food insecurity. Some government policy responses to the food crisis have been unhelpful, and will aggravate the problem in the longer term.

 

Food security is a particularly sensitive issue in poorer countries, and demands for it can easily manifest themselves on the streets, causing political instability. Some causes of the present food price rise are likely to continue in the longer term, so the international community will have to find ways of adjusting to a new era of dearer food.

Food security is not a precise concept but is an extremely powerful one. It can be defined as 'access by all people at all times to enough food for an active, healthy life'. On this definition, large parts of the developing world are, and long have been, suffering from food insecurity, as shown by the existence of chronic malnutrition.

Until the late eighteenth century, Western countries were in a similar situation. This led economist Thomas Malthus to argue that population growth pressure would hold down food consumption per person to the level of bare subsistence. Three factors allowed Western countries to escape this Malthusian trap while they industrialised, namely:

· the availability of huge areas of good uncultivated land in the Americas and Antipodes;

· mass emigration of surplus European population to these areas; and

· falling transport costs that made international trade in food profitable.

In the 20th century, episodes of mass hunger have been mainly related to disruptions of war, or follies of authoritarian leaders (for example, China's Mao Zedong, North Korea's Kim Jong Il and Zimbabwe's Robert Mugabe). The main systemic threat to world food security emerged in the 1960s, but was staved off by the intensification of wheat and rice cultivation in Asia -- the 'green revolution'.

Recent price rises. Since 1974, the real price of food has been drifting gradually downwards, and by 2005, had declined by a remarkable 75%. During these three decades the world became accustomed to cheap food, even if it was still too expensive for many of the poor in developing countries. Since 2005, food prices have gone dramatically into reverse, and are now nearly back to the 1974 level. This change has affected virtually all food commodities, and is not being driven by the specifics of one particular market. For example, since 2000:

· prices of wheat, butter and milk have tripled;

· prices of rice, maize and poultry have almost doubled; and

· prices of meat, palm oil and cassava have also risen sharply, but not as much.

Driving factors. A combination of factors caused this sudden price turnaround:

Oil's upward trend. The oil price has risen faster than food prices since 2005, and is driving them upwards. Modern commercial agriculture is extremely energy-intensive, using chemical fertilisers and tractor power, as is the food distribution industry. Fuel costs of both are soaring. Poor weather conditions. Food prices have been driven by increased volatility of supply, due to changing and increasingly drastic global weather conditions, which have rendered unstable not only tropical commodities -- particularly those exposed to hurricanes, such as oranges -- but also drought-bearing ones, such as the grains that biofuels now demand:

· Earlier this year, world wheat inventories dropped to their lowest level in 30 years, after hot, dry spells in 2007 hurt yields in India, Canada, Argentina and Australia, while a freeze, and excessive rainfall, curbed harvests in the United States.

· Australia, a major food-growing region, has been subject to severe drought since 2002, reducing agricultural production.

· Starting last December, heavy rains and flooding in Southern Africa raised the prospect of serious regional food shortages. Zambia and Mozambique saw significant destruction of crops and flooding of arable land.

Diversion of maize and other crops to biofuel production. The rising oil price encourages biofuel production from maize and other crops. US government subsidies for biofuel production are a further incentive. This reduces the amount available for consumption as food. Speculation. Rising prices have fuelled speculation on future commodity prices, exacerbating current price increases. Institutional investors who aim to maintain long positions in soft markets thus are reinforcing agricultural prices:

· For example, wheat this year became a hot staple for investors and financial analysts. The futures market reinforced the consumption trend: with food inflation expected to continue, wheat appeared the safest bet for investors in the years to come -- prior to its dramatic surge, wheat had shown less volatility than maize and soybeans.

· Some governments have responded negatively to the perceived role of speculation in boosting food prices. For example, Peruvian Premier Jorge del Castillo on March 18 stated that the government "declared war" on food price speculation.

China's new prosperity. As real incomes rise in China, demand increases for luxury dietary items, like meat and dairy products:

· Per capita meat consumption more than doubled in China between 1980 (20 kilograms, kg) and 2005 (50 kg). Increased production of these products has a large multiplier effect on demand for feed grains and water resources (eg 10,000-13.000 litres of water is required to produce one kg of beef, versus 1,000-2,000 litres to produce one kg of wheat).

Oxford Analytica (Reino Unido)

 



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