Sunday, April 13, 2008

Why Food Costs Are Climbing

Why Costs Are Climbing

By Eric Reguly

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As food prices surge, starvation looms for millions. Experts call for emergency action but admit there's no quick fix.

Rome - Fatal food riots in Haiti. Violent food-price protests in Egypt and Ivory Coast. Rice so valuable it is transported in armoured convoys. Soldiers guarding fields and warehouses. Export bans to keep local populations from starving.

For the first time in decades, the spectre of widespread hunger for millions looms as food prices explode. Two words not in common currency in recent years - famine and starvation - are now being raised as distinct possibilities in the poorest, food-importing countries.

Unlike past food crises, solved largely by throwing aid at hungry stomachs and boosting agricultural productivity, this one won't go away quickly, experts say. Prices are soaring and stand every chance of staying high because this crisis is different.

A swelling global population, soaring energy prices, the clamouring for meat from the rising Asian middle class, competition from biofuels and hot money pouring into the commodity markets are all factors that make this crisis unique and potentially calamitous. Even with concerted global action, such as rushing more land into cultivation, it will take years to fix the problem.

The price increases and food shortages have been nothing short of shocking. In February, stockpiles of wheat hit a 60-year low in the United States as prices soared. Almost all other commodities, from rice and soybeans to sugar and corn, have posted triple-digit price increases in the past year or two.

Yesterday in Rome, Jacques Diouf, director-general of the United Nations Food and Agriculture Organization, said the cereal-import bill for the poorest countries is expected to rise 56 per cent this year, on top of the 37 per cent recorded last year. "There is certainly a risk of [people] dying of starvation" unless urgent action is taken, he said. "I am surprised I have not been summoned to the Security Council to discuss these issues."

The UN's donor countries, he said, need to come up with as much as $1.7-billion (U.S.) to implement quick-fix food programs, such as topping up the World Food Programme, whose emergency food-buying power has been clobbered by the rising prices. Its budget shortfall, the difference between the food it intended to buy and can now afford, is $500-million.

Other UN officials have been equally blunt. Sir John Holmes, the UN's top humanitarian official and emergency relief co-ordinator, said this week that soaring food prices threaten political stability. The UN and national governments are especially worried about potentially violent situations in Africa's increasingly crowded urban areas. Rioting triggered by absent or unaffordable food could cripple cities. "The security implications should not be underestimated as food riots are being reported across the globe," Mr. Holmes said.

Nigeria's Kanayo Nwanze, vice-president of the UN's International Fund for Agricultural Development, sees no short-term fix. "I wouldn't be surprised if there is an escalation of food riots in the next few months," he said. "It could lead to famine in certain parts of Africa if the international community and local governments do not put emergency actions into place."

And it's not just the UN that thinks so. Independent analysts, economists and agriculture consultants say the term most often used to describe the food prices and shortages - crisis - is not hyperbole.

How did it come to this? Surging food prices, now at 30-year highs, are actually a relatively new phenomenon. In the mid-1970s, prices began to fall as the green revolution around the world made farms dramatically more productive, thanks to improvements in irrigation and the widespread use of fertilizers, mechanized farm equipment and genetically engineered crops. If there was a crisis, it was food surpluses - too much food chasing too few stomachs - and dropping produce prices had often disastrous effects on farm incomes.

By 2001, the surpluses began to shrink and prices reversed. In the past year or so, the price curve has gone nearly vertical. The UN's food index rose 45 per cent in the past nine months alone, but some prices have climbed even faster. Wheat went up 108 per cent in the past 12 months; corn rose 66 per cent. Rice, the food that feeds half the world, went "from a staple to a delicacy," says Standard Chartered Bank food commodities analyst Abah Ofon.

The price of Thai medium-quality rice, a global benchmark, has more than doubled since the end of 2007. This week it reached a record $854 a tonne, which helps explain why World Food Programme trucks carrying rice in certain parts of Africa have come under attack.

Food prices in the first three months of 2008 reached their highest level in both nominal and real (inflation adjusted) terms in almost 30 years, the UN says. That's stoking double-digit inflation and prompting countries such as Egypt, Vietnam and India to eliminate or substantially reduce rice exports to keep a lid on prices and prevent rioting. But, by reducing global supply, this only increases prices for food-importing countries, many of them in West Africa.

Throughout history, the world has seen food shortages and famines triggered by drought, war, pestilence, crop failures and regional overpopulation. In the Chinese famine between 1958 and 1961, an estimated 30 million people died from malnutrition. In the late 1960s and early 1970s, severe food shortages hit India and parts of southeast Asia. Only the emergency shipment of hundreds of thousands of tonnes of grain from the U.S. prevented a humanitarian disaster. Drought, violent conflict, economic incompetence, misfortune and corruption created deadly famines in Ethiopia and Sudan in the first half of the 1980s.

In each case, the food shortages were alleviated through emergency aid or investment in farming and crop productivity. While no one so far is dying of hunger in this latest crisis, the UN and agriculture experts predict years of pain, at best, and severe shortages, possibly famine in the worst-hit countries. The reason: High prices are likely to persist for years.

Swelling population explains only part of the problem. The world's population, estimated at 6.6 billion, has doubled since 1965. But population growth rates are falling and, theoretically, there is enough food to feed everyone on the planet, said Peter Hazell, a British agriculture economist and a former World Bank principal economist.

Why millions may go hungry, he said, is because prices are so high, food is becoming unaffordable in some parts of the world.

The "rural poor" (to use the UN's term) in Burkina Faso, Niger, Somalia, Senegal, Cameroon and some other African countries exist on the equivalent of $1 a day or less. As much as 70 per cent of that meagre income goes to food purchases, compared with about 15 per cent in the U.S. and Canada. As prices, but not incomes, rise, the point may be reached where food portions shrink or meals are skipped. Malnutrition sets in.

The dramatic price rises have been driven by factors absent in previous food shortages.

They include turning food into fuel, climate change, high oil and natural gas prices (which boost trucking and fertilizer costs), greater consumption of meat and dairy products as incomes rise (which raises the demand for animal feedstuffs), and investment funds, whose billions of dollars of firepower can magnify price increases.

Driven by fears of global warming, biofuel has become big business in the U.S., Canada and the European Union. The incentive to produce the fuels is overwhelming because they are subsidized by taxpayers and, depending on the country or the region, come with content mandates.

Starting next week, Britain will require gasoline and diesel sold at the pumps be mixed with 2.5-per-cent biofuel, rising to 5.75 per cent by 2010 and 10 per cent by 2020, in line with European Union directives. Ontario's ethanol-content mandate is 5 per cent. As the content requirements rise, more and more land is devoted to growing crops for fuel, such as corn-based ethanol. In the EU alone, 15 per cent of the arable land is expected to be devoured by biofuel production by 2020.

That's raising alarm bells, especially given lingering doubts about the effectiveness of ethanol in combatting climate change. British Prime Minister Gordon Brown said this week he's worried that ethanol production is pushing up food prices everywhere, and he called for an urgent review of the issue. Economist Dr. Hazell has said that filling an SUV tank once with ethanol consumes more maize than the typical African eats in a year.

Rising ethanol demand is one of the main reasons why Wall Street securities firm Goldman Sachs predicts high food prices for a long time. "We believe the recent rise in agriculture prices is not a transient spike, but rather represents the beginning of a structural increase in prices, much as has occurred in the energy and metals markets," Jeffrey Currie, Goldman's chief commodities analyst, said in a research note last month.

Severe weather has clobbered crop production among some big exporting countries. Drought in Australia, the third largest wheat exporter after the U.S. and Canada, has pushed wheat production down by half since the 2005-06 crop year. Statistics Canada said Canadian wheat production fell 20.6 per last year. Exports, as a result, are expected to fall by six million tonnes in the 2007-08 year.

While Australia and Canada could bounce back in the next season or the season after, depending on temperatures and rainfall, rising global temperatures do not bode well for agriculture in many parts of the world.

The UN has predicted that climate change could reduce production in developing countries by 9 to 21 per cent by 2080 and that sub-Saharan Africa could lose more than 30 per cent of its main crop, maize. Southern Asia, it said, could see millet, maize and rice production fall by 10 per cent. The challenge is to offset the losses with higher crop yields on arable land less affected by climate change.

Mr. Ofon, of Standard Chartered Bank, said rising demand in the face of production shortfalls does not fully explain the dramatic price increases. Investors are the other driver. They have discovered they can make money from food commodities as easily as they can in oil, gold or nickel. "Fund money flowing into agriculture has boosted prices," he said. "It's fashionable. This is the year of agricultural commodities."

But Mr. Currie of Goldman Sachs dismisses the theory that funds are pushing prices higher than they would be otherwise, though the funds can make prices rise and fall quickly in the short term. "The simple truth is that the funds don't take delivery of the commodity," he said in an interview. "Therefore they cannot sit on them and put them in silos. Therefore they can't affect prices over the long term."

In other words, the rally in food prices is being caused by demand exceeding production, resulting in dwindling food stockpiles. UN's International Fund for Agricultural Development, for one, assumes prices will stay high for as long as 10 years.

Agriculture economists and the UN have not lost all hope. New irrigation systems are inevitable in Africa and have the potential to boost crop production dramatically. Ditto for the use of fertilizers. Only three to five kilos of fertilizer per hectare is used in Africa, compared with about 250 kilos in the U.S. The problem with using more fertilizer is cost. Fertilizers such as urea are derived from natural gas, and gas prices have climbed, too. The price of urea has almost tripled since 2003, to $400 a tonne.

Dr. Hazell said some big countries, notably the U.S., Canada and Ukraine, have the capacity to increase crop production substantially. Already world cereal production is on the rise, although not nearly fast enough to end the crisis. The Food and Agriculture Organization yesterday forecast a 2.6-per-cent rise in cereal production in 2008.

Cutting back on ethanol production alone would go some way to restoring supply-demand balance in the food markets. "If we decide to do something about it, we can just use less food for fuel," he said.

But everyone - analysts, economists, agriculture experts, the UN - thinks all bets are off in the next two or three years. It's almost impossible to boost production quickly, because of land and water shortages and competition from biofuels.

"I can say with some degree of confidence that if governments and international development agencies do not put in place a concerted effort quickly, then we are looking at a very serious problem," Mr. Nwanze said.

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