Food doesn’t cause crises, governments do

December 29, 2010

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

HONG KONG — Food prices are rising to dangerous levels. There is talk of a coming crisis, like the ones that produced riots around the world in 2008 and 1974. Many of the ingredients of a disaster are present, but governments can stop it before it causes too much damage.

A warning sign is the price of traded staples like wheat, corn and rice. Prices shot up in 2010, soaring 26 percent from June to November and brushing 2008’s peaks, according to the United Nations’ FAO Food Price Index. That hits poor countries which import much of their food, such as the Philippines, Mexico, Nigeria and Pakistan. High prices deprive the poor, who already spend as much as half of their income on food. The market still clears, but at a riot-inducingly high price.

For most big countries, food prices are a domestic affair. Just 12 percent of cereals produced are traded across borders. In countries that grow their own, like China, Russia and India, buyers often pay government-set prices that have little link to global markets. Yet the self-servers are suffering too. China, which only really uses global markets for soybeans, is fretting over soaring shop prices for everything from pork to seaweed. In India, a fifth of the population is undernourished, according to the United Nations. Both countries have their quirks — in India, awful infrastructure means a third of produce spoils before it reaches the market — but something is clearly making the problem worse.

It isn’t shortages. True, demand for staple grains is predicted to rise 2 percent in 2011, even as production falls 4 percent. But grain reserves run to almost 17 percent of total usage, according to Rabobank — around the level generally seen as a sensible buffer. Nor are the main problems population trends or changing eating habits in developing markets. That extra demand may be making the world a bit more crisis-prone, but more productive, mechanised farming methods in China, India and Africa have potential to create some slack.

The main cause looks to be too much money. Governments have effectively printed the stuff to help their economies recover. This has created two side effects. First, investors have bought exposure to commodities as an economic hedge. Second, the price of foodstuffs has been bid up as low interest rates reduce the opportunity cost of hoarding them — especially in China, where money supply grew by almost 20 percent in 2010.

Whether those high prices turn into a crisis depends on two things. First, short-sighted policy responses. Food producers often ban exports when they fear shortages or price spikes are coming. Sometimes they are right to worry — Russia’s recent droughts have left it with a genuine wheat shortfall. But India introduced a rice export ban in 2007 when it still had a sizeable surplus, helping to double the world price. By 2008, over 30 countries had some kind of controls in place. Export bans cause bubbles abroad; they also stop farmers from benefitting from high prices that would get them growing more.

The second flash point is the oil price. That increases transport costs for food. But it also encourages politicians to divert grains into biofuels, which become competitive when oil hits $60 per barrel. The average oil price in 2011 is forecast at $84, according to a Reuters poll. The United States, which supplies two-thirds of the world’s corn exports, diverted huge amounts into biofuel in the run-up to 2008’s crisis, causing 70 percent of the rise in corn prices, according to the IMF. That distortion was passed straight on to the world’s poor.

Food riots in 2011 are possible, but not inevitable. Granted, the world will have to get used to more food scares as the population expands and the diets of the poor get richer. But the moment when humanity outgrows the earth is thankfully not yet here. Cool-headed policies can still prevent a real crisis.

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