The Food and Agriculture Organization under the United Nations issued a rare alert last month that the drought in north China could put at risk wheat production and also put pressure on wheat prices.
Further, wheat futures in Chicago have soared more than 60 percent in the past year and last month jumped to the highest level since 2008. Corn and soybean prices have also witnessed steep increase.
Food prices are soaring to record levels, threatening many developing countries with mass hunger and political instability. Finance ministers of the Group of 20 leading economies discussed the problem at a meeting in Paris last week, but for all of their expressed concern, most are already breaking their promises to help.
After the last sharp price spike in 2008, the G-20 promised to invest $22 billion over three years to help vulnerable countries boost food production. To date, the World Bank fund that is supposed to administer this money has received less than $400 million.
Food prices are now higher than their 2008 peak, driven by rising demand in developing countries and volatile weather, including drought in Russia and Ukraine and a dry spell in North China that threatens the crop of the world’s largest wheat producer. The World Bank says the spike has pushed 44 million people into extreme poverty just since June.
A senior economist at HSBC has warned that Britain could experience riots if food prices continue to soar in line with the cost of crude oil.
Karen Ward told Sky News that amid "very low" wage growth in the developed world, failing to compensate workers for recent rises in food and energy prices could provoke social unrest in the U.K.
Energy markets -- where prices are near their highest levels since 2008 as battles rage in oil-rich Libya -- are "a significant contributor" to higher food prices, Ward told Sky Tuesday.
Food price inflation has helped spark the uprisings in North Africa and the Middle East that toppled longstanding rulers in Tunisia and Egypt.
Last week, the United Nations said food costs are at their highest point since the agency began tracking them 20 years ago.
"The Great Food Crisis of 2011" is here. That's what the highly respected magazine Foreign Policy is calling the rampant food inflation that is causing problems worldwide.
The British government just completed a two-year study involving 400 experts from 35 countries to assess the global food situation. The results are scary. Here's what the report said:
By 2050 global food supplies will not be sufficient to feed an expanding population. The UN estimates that food production must rise by 70 percent to feed a world population of more than nine billion in 2050. [But] rising demand and surging global population coupled with increasing resource conflicts over land, water, and energy will hamper food production.
And the United Nation's Food and Agriculture Organization (FAO) states that the "double whammy of high food prices and the global economic slump pushed an additional 115 million people into poverty and hunger." Over 1 billion people go hungry every day and it's rising.
2008 was also a bubble year for many commodities as U.S. food prices were up 5.5%. But 2011 isn't as simple as a bubble -- supply-and-demand economics suggest long-term imbalances. We have a real crisis when we combine the dismal long-term outlook with short-term supply shocks caused by the forces of Mother Nature and, arguably, climate change. It is time to be prepared.
The ongoing popular uprisings in North Africa and the Middle East poses the question if other developing countries, including Ghana, may experience similar or other forms of uprisings in the light of the imminent global food crisis of 2011.
In order to answer this question one needs to look at the underlying drivers for the uprisings in both 2008 and now.
In 2008 riots from Haiti to Bangladesh to Egypt over the soaring costs of basic foods have brought the issue to a boiling point and catapulted it to the forefront of the world's attention.
Although food prices eased by the end of 2008, the UN’s Food and Agricultural Organization (FAO) convened a World Summit on Food Security at its headquarters in Rome in November 2009, noting that food prices remain high in developing countries and that the global food security situation has worsened.
In January 2011 it became clear that the world was experiencing a second food crisis and that prices have risen to levels close to or above those prevalent in 2008.
In broad terms, food prices today are at the highest level ever recorded by the UN.
Wheat has risen by 58 per cent in the past 12 months, while corn has soared 87 per cent. Raw sugar prices are up 37 per cent.
Overall the UN food price index climbed by over one-third in the past year, with all food goods advancing.
So why aren't we as bad off as we were in 2008? For one reason only: the key staple of more than half the world's population has not taken off along with the others. Rice.
It has gained only a modest 6.5 per cent in the past 12 months.
"I've never loved rice more than now," gushed Abdolreza Abbassian, a senior economist at the Food and Agriculture Organization in Rome. "Probably rice is the commodity separating us from a food crisis."
In the aftermath of 2008, some Asian countries began stockpiling rice more effectively. But we still need to be hyper-vigilant as today's rising oil prices, combined with some weak harvests, are starting to affect local prices.
Bangladesh, Indonesia and China, for example just announced rice increases of over 20 per cent.
If that seems like dull reading, just pause for a moment to contemplate what the current unrest in the world would be like if Asia were also to boil over should rice shortages become an issue.
At one point in 2008, Britain's MI6 foreign intelligence unit warned that as many as 70 countries might be unhinged by food costs.
Since then intelligence agencies have been keeping a close watch on rising food prices because of two events that tend to follow in their wake: widespread political unrest and mass financial devastation.
The milk rally that sent prices up 49 percent this year, more than any agricultural commodity, may be ending as farmers respond with record production and the costliest cheese in a quarter century curbs demand. Output in the U.S., the world’s second-largest producer, may rise 1.7 percent to 196 billion pounds in 2011, enough to fill about 34,500 Olympic-sized pools, the Department of Agriculture estimates. Demand will weaken as restaurants cut promotions and grocers raise prices, said INTL FCStone Inc., a New York-based broker. Futures may drop 14 percent to $16.86 per 100 pounds by Dec. 31, a Bloomberg survey of 10 analysts showed.
Dairies are missing out on profits from milk’s biggest rally since at least 1996 as the surge in grain that drove world food prices to a record, contributing to protests in northern Africa and the Middle East, also boosted the cost of feeding cows. While income for grain and cotton growers will rise more than 20 percent this year, earnings at dairies may drop 13 percent, the government estimates.
“Grain farmers are having some of the best years they’ve had in a long time profit-wise, but you couldn’t say that for dairy,” said Bob Cropp, an economist at the University of Wisconsin in Madison who has been studying the industry since 1966. “Dairy facilities are running at the maximum. With a little softening in demand, prices are going to come down.”
Milk futures on the Chicago Mercantile Exchange closed on March 11 at $19.65, a 32-month high. Prices are up 54 percent from a year earlier as importers from Mexico to China increased buying and the rebounding U.S. economy bolstered domestic demand.
Commodities Rally
Milk’s 2011 rally has exceeded those of all agricultural futures traded in New York and Chicago including cotton, which surged 42 percent and reached a record last week. The Standard & Poor’s GSCI Index of 24 commodities advanced 11 percent, and the S&P 500 Index of stocks rose 3.7 percent. As of March 10, Treasuries gained 0.1 percent this year, a Bank of America Merrill Lynch index shows.
MARK COLVIN: We've heard plenty about how the uprisings in the Middle East and north Africa may affect the price of oil, much less about how the price of wheat may have caused them.
Fred Kaufman is a contributing editor at Harper's Magazine, who's published a number of long articles about what he calls the "food bubble".
He points out that when food prices peaked in 2008, there were riots in more than 60 countries. Prices have now gone past that peak again.
I asked him on the line from New York if that was a contributing factor to the revolts in Egypt, Tunisia, Libya and elsewhere.
FRED KAUFMAN: Well I would say so. I mean the food sector inflation rate in Egypt for the two months previous to the revolution was 17 per cent each month.
And of course we know that revolutions are traditionally led by middle class, angry people and in this case what you have is a situation where the price of wheat goes up, all of a sudden, the price of vegetables goes up and milk and if you no longer can feed your kids milk and fresh meat you're going to get very angry if you're a middle class person.
MARK COLVIN: The obvious parallel I suppose is the French Revolution where the price of bread just went up and up and up until people could take it no longer.
FRED KAUFMAN: Or even look at 1848 when the entire content of Europe goes into revolution and this is directly related to tremendous amounts of famine across the continent. Now I'm not saying there's famine, because now the situation with food has changed, which is that people aren't really going hungry because there isn't enough food. One thing we have to realise is that there is more than enough food; there's more than enough food to feed double the world's population.
The issue is not enough food; the issue is can you afford the food? And of course this leads directly into what I've been talking about for the past year and a half, which is speculation in global wheat and food markets.
MARK COLVIN: You call it the food bubble I think. What does that mean?
FRED KAUFMAN: Well, what it means is that there are exterior forces at work forcing up the price of wheat, forcing up the price of global wheat. Because remember that the last food bubble we had in 2008, when all was said and done, the wheat harvest of 2008 was the greatest the world had ever seen and in fact as the statistics are coming in from Russia and as the out, you know, we're seeing what's probably going to happen now that rain and snow has hit China it's looking as though we're going to see quite a good wheat harvest for this year too.
So that there's something else going on and what I discovered was actually there's a tremendous and a new kind of speculation going on by the largest banks in the world, who now perceive food as one of the last bastions of real value on Earth.
MARK COLVIN: Who's driving it then; which banks?
FRED KAUFMAN: They are the usual suspects. I mean of course Goldman Sachs was the first one who came up with this particular sort of food derivative in 1991, but of course as soon as Goldman had figured this thing out and it became very lucrative for them, they were followed by everybody; by JP Morgan, Chase, Deutsche and Barkleys and of course Lehman and AIG in America, which were part of the great financial debacle.
These financial products, what I call food derivatives, really hijacked the global wheat markets, because what they did is they put a tremendous demand pressure on wheat and on wheat futures that was exterior to any supply and demand natural pressure and these products were made, these are what are called long-only products, in other words they were made only to buy wheat futures. There's no mechanism in these products ever to sell and so of course when there's five times the year there's a tremendous demand of hundreds of billions of dollars to buy; this is of course going to have an effect on the global price.
MARK COLVIN: That's extraordinary; a product that you can buy but not sell?
FRED KAUFMAN: Yeah they're called the long only commodity index. And as I say Goldman masterminded this product in 1991 but of course the markets were not completely deregulated throughout the 1990s these are the American futures markets, and so what happened by the end of the 1990s is that the markets were deregulated and so large banking institutions were suddenly allowed to take huge stakes in food futures, which they had not been allowed to do since really before the Great Depression, since the financial regulations had been in place since then.
And after those position limits were given exemptions for these banks they went whole hog and then of course what happened was a perfect storm after 2005, with all the other derivatives and mortgage backed securities and stock markets and currencies tanking, where was a safe haven, where was a refuge? Well it was in commodities.
MARK COLVIN: Are these though like the derivatives that none of us understood before the global financial crisis but which led to it?
FRED KAUFMAN: Well you know what's so interesting is that actually a wheat future is the world's first financial derivative. So derivatives have been around for a long time and in fact these financial derivatives are not all bad in the sense that they help people who actually buy and sell wheat, the farmers and the processors, they help them manage their risks.
The problem with derivatives is when they subvert the market. In other words when they're no longer being used by what are called the bona fide hedgers, the people who actually have a stake in the markets, and this is what the banks have done. They realised, there's a way that we can eke money out of this mathematically and they eked out tremendous profits.
The current crop of deposed heads of state may have Wall Street to thank for their forced retirement. While the causes of helter-skelter commodity prices are complex -- natural disasters such as floods and droughts can play a big role, as can interest-rate shifts engineered by central bankers around the globe -- rapid-fire trading and speculation on the Street can magnify the problem.
In an era when vast pools of capital shift in and out of markets for basics like food and oil with the a few computer keystrokes, trading can cause prices to see-saw in ways that are sometimes harrowing and hard to control.
And this wouldn't be the first time. Less than three years ago, another food crisis was marked by rampant financial speculation that helped cause prices to skyrocket and prompted regulators to examine whether traders were also gaming oil prices. At the time, governments were also flush with enough cash to boost food subsidies and calm protesters. This time around, governments ravaged by the crisis lack the financial wherewithal to tamp down prices with subsidies.
Wall Street says that trading keeps food and energy markets liquid, allowing farmers to plan ahead when planting their crops or helping oil producers to know how much crude they can ship. Often, of course, that's true. But there also can be a more brutal calculus at work: big price spikes are good for traders holding onto wheat or oil contracts, allowing them to stuff more money into their wallets while families struggling to make ends meet thousands of miles away suddenly find that it's become too expensive to feed themselves.
The top lobby group for the derivatives industry, the International Swaps and Derivatives Association, says it supports financial regulatory reform, but resists blame for pricing problems. "Although speculation is often blamed for causing problems in markets, the economic evidence shows that it is in fact a necessary activity that makes markets more liquid and efficient," ISDA Head of Research David Mengle wrote in a September memo.
Meanwhile, derivatives trading remains a largely under-regulated affair, even though such gambling was a major cause of the financial crisis in the United States and broadened the severity of the entire debacle.
It is now widely accepted that speculation helped fueled the price hikes of 2008: Economists at Princeton University, World Bank, the European Commission, the Peterson Institute for International Economics, the International Monetary Fund, Rice University, the Massachusetts Institute of Technology, and the Texas A&M University Agricultural and Food Policy Center have all published studies indicating that speculation played a role in 2008's commodity-price swings.
"Look, you have no market without speculators, so I like speculators," CFTC Commissioner Bart Chilton told HuffPost. "But it's more like a casino right now than anything else."
