Food prices have increased rapidly in the last 5 years after a long secular decline in food prices relative to world income. Not only have prices of essentials increased but heightened volatility is also being witnessed as stocks have started to run low. Now major organizations like the United Nations and Goldman Sachs are warning that the trend in food prices will keep on showing an upwards bias due to various secular factors coming into play.
Also Read about how Effects of Globalization of Agriculture are leading to Hunger Riots.
Why are Food Prices Increasing
The increase in Food Prices can be attributed to many reasons both fundamental and technical. Global Population growth is a significant driver along with food becoming an asset class for global funds.
1) Rise of Food Commodity as as Asset Class – Various Funds launched by Investment Banks have led to higher prices of agricultural products. Fund Managers are increasingly using these funds based on derivatives of corn, wheat, rice etc as a long only investment. While earlier food prices were determined by current supply and demand curves, nowadays future demand/supply perceptions are increasing affecting these prices mostly on the upside.
2) Growth of Chinese and Indian Middle Class – India and China have seen increasing prosperity over the last several years driven by strong economic growth. The rise in the Middle Class of these countries have led to increasing food consumption. The shift in food preferences towards meat has led to more grain consumption as meat consumption require more energy and grain usage, than plain vegetarian consumption.
3) Increased Usage of Crops for Biofuel – Countries like US and Brazil have mandated increased usage of biofuel as a substitute for petroleum based fuel for Transportation. Large amounts of crops like Corn are being diverted towards the manufacture of biofuels. Land which was meant for other crops is also being converted for usage of biofuel based crops. While the Global Financial Crisis has somewhat cooled the Corn prices, the return of economic growth is sure to put pressure on crop prices again. Note Biofuels as a solution to Climate Change and Global Warming is a small niche one at best.
At the end of 2006, food prices across the world started to rise, suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people – mostly children – couldn’t afford to get food any more, and sank into malnutrition or starvation. There were riots in more than 30 countries, and at least one government was violently overthrown. Then, in spring 2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special Rapporteur on the Right to Food, calls it “a silent mass murder”, entirely due to “man-made actions.
Here’s how it happened. In 2006, financial speculators like Goldmans pulled out of the collapsing US real estate market. They reckoned food prices would stay steady or rise while the rest of the economy tanked, so they switched their funds there. Suddenly, the world’s frightened investors stampeded on to this ground.
So while the supply and demand of food stayed pretty much the same, the supply and demand for derivatives based on food massively rose – which meant the all-rolled-into-one price shot up, and the starvation began. The bubble only burst in March 2008 when the situation got so bad in the US that the speculators had to slash their spending to cover their losses back home.
Food Security Map
A Food Security Risk map from Maplecroft shows the most vulnerable regions in the world in terms of food security are South Asia and Africa. The only low risk countries are USA, Australia and Western Europe with the other geographic regions falling into the middle risk category.
According to the Food and Agriculture Organisation (FAO) in Rome, global wheat production is expected to fall 5.2% in 2012 and yields from many other crops grown to feed animals could be 10% down on last year.
“Populations are growing but production is not keeping up with consumption. Prices for wheat have already risen 25% in 2012, maize 13% and dairy prices rose 7% just last month. Food reserves, [held to provide a buffer against rising prices] are at a critical low level.
As Goldman notes, food inflation has been one of the most significant sources of headline inflation variation in emerging markets (EM) over the past few years. Since June, international prices for agricultural commodities have risen almost 30%, increasing the risk of fresh, food-related increases to EM headline inflation. We, like Goldman, expect EM headline inflation to start to reflect the relevant pressures more broadly