Food Crisis Looming?

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Food crisis looming? photo: Peter Casier/WFP/flickr

A review of commodities reports and price indices over the last six months seems to point to a ripening of conditions that will likely spark a food crisis later this year.

The specific causes of the 2007-2008 food crisis are still debated, but it is clear that a combination of high oil prices, low food stocks, a low value of the US dollar, and market speculation, drove world food prices to an unprecedented level, sparking riots and unrest around the world. There are important similarities between observable conditions then and now.

Since the summer of 2010, there have been several important crop failures around the world and among major global grain producers, including: Argentina (drought), Australia (heavy rains may impact output), Canada (heavy rains); EU (dry conditions), Kazakhstan (drought), Pakistan (flooding), Russia (drought), Ukraine (drought), United States (drought). Moreover, South America experienced drought and dry conditions as result of La Nina, while China suffered from severe dry conditions and the rest of Asia experience delayed and erratic rains. In Southern Africa severe rains and flooding continue to cause problems.

According to the International Grains Council, “World production is expected to decline by 3.8 percent, to 1,726 million tons: the wheat estimate is lifted […] but the maize total is cut. By far the biggest fall in grains output was in drought affected Russia, with big reductions too in the EU, the US, Kazakhstan and Ukraine.”

The Food and Agriculture Organization’s (FAO) Global Food Price Monitor shows that food prices have risen for seven consecutive months and corn and wheat prices are already at peak levels, last seen during the 2008 food crisis.  Export prices for these have also risen sharply in the last six months. The price of rice, however, remains below peak prices, at 2009 and 2010 levels. This places significant upward pressure on available food stocks and ultimately prices. Early forecasts anticipate that grain production this year will rise, but, it is too early to tell whether actual harvested output will meet expectations. A good harvest in 2011 could significantly reduce the risk of a food crisis (or at least reduce its overall impact), which would cut pressures in the short term. The FAO’s GIEWS December Report however confirms that global grain production is being outstripped by grain utilization.

While grain utilization and grain production represent an important part of the picture, an underlying factor that can tip the balance for the very poor is the price of energy.

According to the US Energy Information Administration’s Short Term Outlook the price of oil is expected to average $100 per barrel in 2011. The price of oil is tightly bound to speculation on the reliability of production in key areas, especially in the Middle East. Upheavals there can only add to upward pressure on oil prices and increase market instability (see our recent Podcast on the topic).

The low value of the US dollar also played a role in the 2007-2008 food crisis. At present, currency outlooks for 2011 anticipate the value of the US dollar to continue its downward trend, especially as other currencies reach parity. However, traditionally, economic and geopolitical shocks tend to result in upward pressure on the value of the dollar. How the crisis in the Middle East (or any other event this year) will impact the value of the dollar will simply remain unclear.

In an effort to address the underlying problem revealed by the food crisis, in 2008 the UN established the High-Level Task Force on the Global Food Crisis, which created a global strategy and action plan called the “Comprehensive Framework for Action” (CFA), which recommends a two-track approach to addressing severe food shortages by meeting the immediate needs of vulnerable populations and building longer-term resilience to similar price shocks in the future. The CFA was updated in September 2010, and “reaffirms the importance of a comprehensive approach to food and nutrition security that incorporates availability of food, as well as its access, utilization and sustainability.”

The degree to which governments are able and prepared to mitigate immediate price pressures (through coordinated action and/or market intervention) and access to food, will shape the intensity of any crises this year.

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