WASHINGTON — First it was shelter. Now food.
Still reeling from the U.S. housing collapse, global markets are confronting a dangerous new bubble: food inflation.
The price of the world's three main grains – rice, wheat and corn – have all more than doubled in the past year, affecting just about everything people eat, and fanning social unrest in some of the most unstable corners of the world.
Canadians might be forgiven for not noticing. The remarkable rise of the loonie has so far largely insulated them from the kind of rampant inflation that is hitting much of the rest of the world. Canadian prices were up 1.8 per cent in February compared with last year, less than half the U.S. inflation rate – a gap economists say is largely due to the strong dollar.
A man sells rice from the National Food Authority at a store in Manila on Thursday March 27, 2008. A sharp rise in the price of rice is hitting consumer pocketbooks and raising fears of public turmoil in the many parts of Asia where rice is a staple. (AP Photo/Aaron Favila)
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Signs of stress are emerging just about everywhere else. Food riots have erupted in Egypt, Morocco, Senegal and Cameroon. In Thailand, rice farmers are sleeping in their fields to prevent thieves from stealing their crops.
Numerous countries, including Argentina and Vietnam, have capped or taxed exports of key farm products in a bid to quell domestic inflation, running the risk of violating international trade rules. To ease growing shortages, the Philippine government has asked fast-food restaurants to serve less rice with meals to ease shortages.
In Egypt, the price of many basic foods has spiked as much as 50 per cent in a matter of months. In Asia, where rice is part of virtually every meal, prices are rising almost daily.
The United Nations World Food Programme warned this week it will have to ration food aid to cope with soaring grain prices unless it gets an emergency cash infusion of $500-million (U.S.) from donor countries.
“We are seeing a new face of hunger – people who suddenly can no longer afford the food they see on store shelves,” lamented Sheila Sisulu, deputy executive director of hunger solutions for the UNFP. “Prices have soared beyond their reach.”
And yesterday Chinese authorities announced they will pay farmers substantially more for rice and wheat as they try to boost output and cool surging inflation that threatens to spark unrest ahead of the Beijing Olympics.
“This could be the next bubble,” suggested William Cline, an agricultural economist and senior fellow at the Peterson Institute for International Economics in Washington.
The trick is sorting out how much of the recent inflationary burst is permanent, and how much is caused by speculators flocking to commodities to escape the turmoil in financial markets. “There's a lot of speculative money that has gone into commodities as a store of value in turbulent times,” Mr. Cline said.
There are also longer-term factors pushing food prices higher, including global warming, Asia's dramatic economic emergence, $100-a-barrel oil and the United States's love affair with ethanol.
“Markets do adapt over the longer term,” said Kimberly Elliott, a senior fellow at the Washington-based Center for Global Development.
“But in the short-run, we are going to continue to see some pretty serious effects in parts of the world.”
The era of cheap food may be over for a while. Food prices soared 40 per cent between 2006 and 2007, according to a key UN index, and the rate of inflation has accelerated this year. In a report this month, the United Nations predicted that food prices are likely to remain high for a decade.
The most lasting cause of higher food prices is certainly population growth. As countries such as China and India grow and prosper, they are consuming a greater share of the world's food. Prosperity affects how much people eat and what they eat.
This has pushed inventories such as rice and wheat to lows not seen in decades. World rice inventories currently stand at about 72 million metric tones, equal to about 17 per cent of what the world consumes annually and the lowest level since the 1970s. The U.S. Department of Agriculture has predicted that, this year, wheat inventories will hit their lowest point since 1946.
The Chinese, for example, are eating a lot more meat as they move from rural areas to cities. Ms. Elliott pointed out that it takes roughly eight pounds of grain to produce a single pound of meat.
Ms. Elliott warned that export controls aren't the answer to rising prices because they distort markets and may ultimately discourage production.
Experts also point to climate change as a reason for rising food prices. Rising temperatures are being blamed for longer and more frequent droughts, such as the ones now affecting grain production in Australia and Ukraine.
The spike in oil prices isn't helping.
Farmers consume large quantities of fertilizer, which in turn depends on now more expensive fossil fuel to produce. Likewise, in a global economy, food is shipped over ever-greater distances, compounding the impact on food prices when oil prices rise.
Even oil-rich Persian Gulf states, such as the United Arab Emirates, are experiencing rampant food inflation, and the resulting unrest. Last week, hundreds of construction workers demanding higher wages burned cars and ransacked buildings. Like most Arab states, the UAE's currency is pegged to the falling U.S. dollar, forcing consumers to pay more for the largely imported food they eat.
Another major culprit is the ethanol boom in the United States, Brazil and Europe. The diversion of crops, such as corn and soybeans, to produce biofuels has raised the price of all crops and diverted fields from food to fuel production.
This, in turn, has sparked growing tension between North and South over agricultural policies. During a visit to London this month, Egyptian Investment Minister Mahmoud Mohieldin complained that U.S. and Europe biofuel subsidies are hurting the world's poor.
“[The market] is out of order,” he told Dow Jones. “It sends the wrong message to the world, especially its poorer nations. It takes from the food of people to feed thirsty automobiles used by the relatively rich.”
Oddly, global consumers may get some relief from higher prices if Americans endure some economic pain as the U.S. economy slumps.
“We may quickly see a decline in [food] prices if we see a recession in the United States,” said Ms. Elliott of the Center for Global Development.
