Small shocks bring big consequences
Felicity Lawrence, The Guardian 28 May 08;
Why is there a problem now?
The price of rice has reached record highs in recent months, moving from $327 a tonne a year ago to $1,000 a tonne last week. Yet there is no serious shortage of rice - global production and consumption are roughly in balance. Supply has been affected by floods in Bangladesh which forced it to buy more on the global markets than normal, and the cyclone in Burma will probably force it to do the same, but the UN's food and agriculture organisation says rice producers generally have not been not hit by large-scale climate shocks and supply and demand is not the main cause.
Instead the cost of producing rice and transporting it has gone up as oil prices have risen, and this oil-driven inflation seems to be the underlying factor in the recent rice crisis.
Rice differs from other agricultural commodities such as corn, wheat and soya, in that very little is traded internationally. Just 7% of the global harvest, about 30m tonnes a year, goes on to the world market, but precisely because the market is so thin, small shocks can lead to great volatility.
Half the world's population, more than 3 billion people, depend on rice for their staple food, and it is one of the most politically sensitive of agricultural commodities.
Several governments, worried by the political fallout from domestic inflation - in fuel, utility prices, and rent, not just food - have tried to mitigate against the effects by imposing controls on rice exports. In October 2007 India imposed price controls and then a full ban on its rice exports in an effort to keep prices of food, and overall inflation, down at home.
Several other rice exporters followed, including Vietnam, Egypt, Pakistan and Cambodia. That led other countries which are big importers, such as the Philippines and Indonesia, to panic buy, driving up prices. Between January and April 2008, they surged by over 70%.
Who has been hit?
The major rice importing countries are in Africa, Asia and Central America. Africa accounts for 30% of the global rice imports, and Asia 45%. Among the hardest hit are West African countries such as Senegal, Nigeria, Ivory Coast, and Cameroon, where the population has shifted as it urbanises from the traditional staples of millet and cassava to eating rice. These countries became significant importers of rice, and more dependent on food imports generally, when they liberalised their agricultural markets as a condition of IMF/World Bank loans from the late 1970s onwards. Haiti, Mexico and Honduras, whose own agricultural markets and production have been undercut by subsidised US crops dumped when prices were low, are also suffering from the high prices. Senegal, Cameroon, Haiti and Mexico have all seen food riots.
The Philippines and Indonesia are big producers of rice but as their populations have grown and yields stagnated they have needed to make up shortfalls with imports. Other big importers of rice include Iran, Iraq and Saudi Arabia, but since they also benefit from rising oil prices, rising food prices have not had such an effect.
What will happen now?
The FAO predicts good harvests this year which should bring prices down in the short term but not immediately - since some exporting countries still have bans in place until the summer or autumn.
Experts are waiting to see what impact the Chinese earthquake has had on its capacity to produce rice. In the long-term they expect growing populations and growing economic demand to keep prices relatively high.
FAQ: The five factors that are driving up costs
The Guardian 27 May 08;
Why is there a problem with food prices now?
Several factors have come together to drive agricultural commodity prices up:
· Soaring oil and energy prices have pushed up the cost of food production dramatically in the last year: fertiliser is up more than 70%, fuel for tractors and farm machinery is up 30%, pesticides, which depend on oil, are up too, as are labour costs;
· Demand is rising as the global population grows and as people in emerging economies such as China and India use increasing affluence to buy more meat, eggs and dairy products. Over 30% of the world's grain now goes to feeding animals rather than people directly. Farming one acre of decent land can produce 138lbs of protein from grain, but one acre given over to beef farming will produce only 20lbs of protein;
· Droughts in grain-producing areas of the world have hit harvests in the last few years. Grain stocks are at a historic low;
· Biofuels are competing with food for arable land, with both the US and the EU mandating their use. About 30% of the US corn crop is expected to be diverted to biofuels this year;
· Speculative trading in agricultural commodities has grown dramatically. Several big investment banks have launched agricultural commodity index funds, as they look for new areas to make profits in following the credit crunch. The result has been enormous fluctuations in market prices that do not appear to relate to changes in fundamentals such as supply and demand. Four years ago $10-15bn was invested in agricultural commodities funds - now that figure is more than $150bn. Wall Street investment funds own 40% of US wheat futures and more than one fifth of US corn futures.
Different experts give different weight to each of these factors, but agree that their coincidence has led to the current turbulence.
Why have there been food riots?
High food prices and social unrest are historic bedfellows. Global inflation in food, as measured by the international food price index, increased by 40% in 2007 and the dramatic rise continued in first few months of 2008. Soaring food prices hit poorer people and poorer countries hardest, since they spend a much higher proportion of their income on food. In developed countries such as the UK, the average consumer spends 10% or less of income on food, but the poorest fifth of the population spends 25-30% of income on food. In developing countries, poor people may spend 50-80% of income on food, so price rises quickly translate into going hungry.
What's happening to wheat prices?
Wheat prices doubled between May 2007 and February 2008 when they hit record highs. Bread wheats were $900 a tonne in February. Now they are back to $346 a tonne, but still 50% up on last year. Global supply has been affected by the drought hitting some of the main wheat exporting countries - Australia, Ukraine and North Africa. When prices were low, farmers and governments also took arable land out of production. Europe took 20% of its arable land out of production in the 1980s. Unlike corn, most wheat is used for human consumption rather than animal feed or biofuels, but the markets are interrelated, and as more corn is used for fuel and feed, cereal prices overall have risen. The effect has been exacerbated by some exporting countries imposing export taxes to make sure they keep adequate domestic supplies of grain.
Who has been hit?
Egypt and Brazil are the largest importers of wheat; the US is the largest exporter. Thirty years ago Egypt was self-sufficient in grain but it now imports 8m tonnes a year - the equivalent of half the UK's total harvest - and livestock account for over a third of its total grain consumption. The shift in patterns of trade and in diets began in the 1970s, when the US poured food aid into the country in the form of subsidised grain and helped President Sadat's regime through riots over shortages in 1974. Brazil, one of the world's largest agricultural producers, has become a major importer of wheat because it uses huge amounts of grain to feed intensively-reared poultry for export.
What will happen now?
High prices have encouraged more production. The EU has abandoned its compulsory programme to set aside land, Russia, Ukraine and Kazakhstan have increased production, and Australia has recovered well. Record wheat production is expected in 2008 which will bring prices down. Over the long-term we can expect to prices to soar again: a Cabinet Office report predicted that by 2050, half of arable land in the world might no longer be suitable for production because of water shortages and climate change. By then the global population is expected to have grown from today's 6.3 billion to 9 billion.
