FAO and USDA Warn of New Surge in Global Food Prices
Global food prices have inched past records set at the height of a commodity price boom in 2008. This time -- at least so far -- products like sugar and oilseeds are leading the charge, with prices for the cereals such as rice that are staple foods of the poor still below peak levels. Lowered projected harvests and stocks are to blame, according to independent reports from the US Department of Agriculture and the UN Food and Agriculture Organization.
The FAO's Food Price Index, which tracks a basket of key commodities, rose last month to 215 points, surpassing the June 2008 record of 213 points. According to the organisation, the "global food system is becoming more vulnerable and susceptible to episodes of extreme price volatility." It blamed the financialisation of food commodities, extreme weather events, links between food and energy, and more tightly integrated markets for the vulnerability. Although prices for nearly all food commodities have risen, the sharpest increases were concentrated in sugar and vegetable oil.
Sugar prices, according to the index, are the highest they have been in over twenty years, following a smaller-than-expected crop in Brazil and flooding in Australia. Prices for the sweetener have been volatile this month, with many traders awaiting announcements from the Indian government on how much it will make available for export.
Poor Harvests and Limited Stocks
Key staples may yet see further price increases, with the FAO and others reporting bleak prospects for this year's crops in several large agricultural exporters. La Niña, a weather phenomenon originating in the Pacific Ocean, has given Argentina unusually dry weather, leading to smaller than usual outputs of soybeans and corn. The heavy rains in Australia have affected the wheat crop in addition to sugar. Dryness in the US is affecting corn and wheat production.
Even smaller producers are facing challenges at meeting the demands of domestic markets. Excessive rain interrupted the rice harvest in Madagascar, while drought hit farm production in Russia and Central America.
Global cereal production is projected to be lower in 2011 than the previous three years. Developing country producers are expected to make up some of the shortfall in developed countries. Rice, among cereals, has the best stock-to-use ratio - production is expected to be the highest since 2007. Although wheat stocks are higher than 2007 levels, the FAO projects that it is the cereal most likely to affected by changes in production.
The rise in food prices has contributed to inflationary pressures in some major economies. New Delhi and Beijing have moved to ease the pressure on price-sensitive consumers by lowering import barriers on some goods while restricting exports of others.
Indian government reports show food inflation easing. However, soaring prices for some goods, such as onions, an important and politically-sensitive food, have led the government to clamp down on hoarders, ban exports and open its borders to Pakistani imports.
China is also struggling with growing demand for products such as vegetable oil. Although the Chinese government had been taking steps in 2010 to ward off inflation, by lowering transportation fees on the movement of food, it continues to struggle to keep prices in check.
Although food prices are a much smaller part of household spending in rich countries, the European Central Bank has also expressed concern over food-led inflation.
In response to the high prices, and related riots in places such as Algeria, Robert Zoellick, a former US trade representative and current president of the World Bank, has urged governments to prioritise tackling food security at the upcoming meeting in Washington of the Group of leading 20 economies. Zoellick wrote in the Financial Times arguing for the merits of free markets in ensuring food for everyone, calling on donor governments to rein in export restrictions on humanitarian grounds, provide better information on stocks and weather, and provide food to those most at risk.
Others, such as Duncan Green of Oxfam and Raj Patel of Food First, have stressed the unique ability of governments to stabilise prices, incentivise food production, and provide food safety nets. Green criticised Zoellick for failing to call for land reform in favour of the rural poor, increased support for agricultural extension services, and a reversal of government policies that benefit large farms at the expense of smaller ones. Patel argues that the Indian government should spend more to provide public safety nets, but is not doing so because of undue fears of inflation.
The current FAO warnings contrast starkly with its statements in 2010, when the organisation tried to soothe fears that a crisis was in the offing.
FAO officials such as Assistant-Director General Hafez Ghanem, have written about the need to conclude the Doha Round and to reform developed country agricultural policies. He argued that "agricultural subsidies in rich countries limit agricultural growth in developing countries," while export restrictions raised prices for the world's poorest people.
Rising prices will lead some producers to benefit and others to suffer due to the complex interplay between what farmers grow, buy and sell. Shortages of critical crops will continue to pose difficult decisions for policymakers.
ICTSD reporting. "Price volatility in agricultural markets evidence, impact on food security and policy responses", UN FOOD AND AGRICULTURE ORGANIZATION, January 2011; "Algeria: 2 killed in riots over rising food prices", ASSOCIATED PRESS, January 11 2011; "Free markets can still feed the world," FINANCIAL TIMES, January 5 2011; "Food prices: exports regulated, action against hoarders", INDO ASIAN NEWS SERVICE, January 13 2011; "Argentina's dry spell trims harvest", FINANCIAL TIMES, January 16 2011; "How to stop the rise in food price volatility", ,, CARNEGIE ENDOWMENT INTERNATIONAL ECONOMIC BULLETIN, January 13 2011; "World agricultural supply and demand estimates", UNITED STATES DEPARTMENT OF AGRICULTURE, January 12 2011.