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Rising Food Prices May Not Signal New Crisis

Aprille Muscara

WASHINGTON, Feb 4 2011 (IPS) - As food prices rose for the seventh month in a row in January, contributing to recent popular unrest in the Middle East and a spike in commodities purchases by developing countries last week, some analysts are quick to make comparisons to the dry years of 2007-2008.

But others warn against panic and oversimplified predictions of an impending food crisis, which contribute to price volatility.

“It is important to underline – and we’ve been trying this rather unsuccessfully – a high food price index doesn’t necessarily mean a food crisis,” Abdolreza Abbassian, senior economist at the United Nation’s Food and Agriculture Organisation (FAO), told IPS in a telephone interview.

After a crisis in 1974, world food prices fell steadily over the following decades and hit an all-time low in the early 2000s. But beginning in 2005, food prices soared, ushering in the crisis of 2007-2008.

In post-mortem studies and short-term forward-looking simulations, including those conducted by the United States Department of Agriculture and jointly by the Organisation for Economic Co-operation and Development and the FAO, researchers largely concluded that the steep prices would continue.

“It is reasonable to expect prices to remain high in the years to come (especially as economies recover from the financial crisis),” stated a 122-page report published last year by the International Food Policy Research Institute (IFPRI) titled ‘Reflections on the Global Food Crisis’.

Although the high prices documented today were essentially predicted, similarities to 2007-2008 seem to be fuelling observers’ panic.

What is similar this time around?

“The underlying drivers of the 2007-2008 crisis were interlinked macro factors: a weak U.S. dollar, rising oil prices, increased bio fuels demand and strong economic growth worldwide,” Derek Headey, senior researcher at IFPRI and co-author of ‘Reflections’, told IPS in an e-mail interview.

“What is broadly the same [now] is that the macroeconomic environment is still conducive to higher prices and whenever you get higher prices, it only takes some small shocks to set off short-run volatility,” he explained.

The U.S. dollar remains weak, oil prices have exceeded 100 dollars per barrel, high demand for biofuels continues and strong growth in China, India and other large developing countries are creating some inflationary pressures, Headey noted.

Some short-term characteristics also seem to be similar. Once prices surged in 2007, interlinked factors created a food price bubble. The most important of these were crop failures, trade restrictions and panic buying – and likely speculation and hoarding, although those are difficult to measure – he argued.

Ongoing droughts in places like China, Somalia, Kenya and Niger threaten food security and unusually large wheat and rice purchases by Algeria and Bangladesh, respectively, last week – and last month’s announcement by Saudi Arabia of plans to double its wheat supply – are leading some to fear the prospect of panic buying.

Jayati Ghosh, agricultural economist and professor at Jawaharlal Nehru University in New Delhi, told IPS’s Stephen Leahy in a recent article that we are in the midst of a new, bigger food bubble.

“The 2010-2011 food price bubble is blamed on last summer’s Russian drought and increased consumption by India and China,” Ghosh told IPS in an e-mail interview.

“However, FAO figures clearly show grain consumption by those latter two countries has actually fallen, mainly because many simply can’t afford to buy as much grain.” Instead, she argues, the current bubble is largely fuelled by financial speculation.

Despite these resemblances, analysts point out that important differences exist. “The situation – as volatile as it is – really, in many aspects, is still very different from what we saw in 2007-2008,” Abbassian told IPS.

What is different?

For one, wheat stocks are higher now than they were before the recent crisis, Headey noted, suggesting that we are better able to cope in case of lost production. And although Russia instituted an export ban on wheat following its drought last year, “We haven’t seen the spread of export restrictions in other countries or other commodities.”

As for recent cases of accelerated buying, Abbassian interpreted them as opportunism. “[There was] a relief in prices at the end of last week, so people took advantage of that,” he told IPS. “The moment prices come down a bit… people try to jump in and buy more.”

“[S]mall countries are price-takers,” he explained. “I wouldn’t really yet call this panic buying.”

While food prices overall, as measured by FAO’s monthly index, are at their highest levels since the organisation began monitoring them in 1990, variations exist across crops and regions.

“[R]ice is still even slightly below last year and half as high as in 2008,” Abbassian noted. “Wheat and corn are at least 50 percent higher than last year but still at least 10 to 20 percent lower than 2008.”

Additionally, “rice, corn and wheat are very critical in food commodities and we should look at them differently than things like cereals, sugars and soy,” he said, highlighting the variability of commodities, prices and trends measured in FAO’s index.

“If you look at countries in Africa that had problems in 2008 who had to import a lot, most had near-record if not record corn crops” last year, Abbassian told IPS. “[A]nd corn, especially white corn, is very important in sub- Saharan countries.”

Jennifer Parmelee, spokesperson for the U.N. World Food Programme, noted that the staple foods consumed by the very poor, namely cereals and rice, have been thus far largely insulated by the price spikes.

“We do closely follow the rise of international food prices because we’re also buying,” she said. In case of a crisis, “those who we support are those who are worst hit.”

“While food prices are high globally, in many of the regions where we work, prices have remained stable and in some cases have fallen,” she told IPS. The price of beans in Central America, for instance, fell in December.

And after a bumper 2010 harvest, prices of maize, sorghum and millet – main staple crops of sub-Saharan Africa – declined steadily at the end of last year and remain at relatively low levels, according to the FAO.

Uncertainty and Volatility

We can’t exactly know whether or not we are heading into another food crisis, but what we are seeing is a self- perpetuating pattern of price volatility and uncertainty – and it will continue until the summer harvests, Abbassian told IPS.

“Price volatility is one of the reasons for uncertainty in decision-making processes, be it the farmer or consumer,” he said. “Volatility invites volatility.”

The unrest in North Africa seems to be feeding this cycle. Egypt, for instance, which is in the midst of a revolution – driven partially by high food prices – is the world’s number one wheat importer. “When uncertainty prevails in these countries in this extent and depth, the market pays particular attention,” Abbassian said.

“I think market actors will be very prudent and pay more attention to bad news than good news,” he added. “Good news will be discarded, bad news will be amplified… Until crops are actually harvested this summer and they can see it, feel it, smell it, then they will say, ‘okay.'”

Looking forward, Abbassian told IPS that, barring any major exogenous events, such as crop-devastating weather disasters, “We are not so concerned about 2010 to 2011”, especially because global food stocks are “very high” compared to 2008.

“Our concern will be what will happen in 2011-2012,” he said. However, “[p]eople should not discard chances of good weather… We [could] get a bumper crop in 2011 and see prices correct themselves.”

“There is a positive note to all this,” Abbassian noted, admitting, “but no one will put their money on it.”