The Middle East and Africa do not need more crises, yet another one is on the horizon.
Food prices have been climbing relentlessly in the past year and show no sign of slowing. A decade ago, during the last sustained price surge, food riots broke out in dozens of countries and the Arab Spring, which was at least partly owing to the atrocious cost of feeding families, ripped through North Africa and beyond, destroying Libya and Syria.
In recent months, the business sections of media sites have been stuffed with stories of commodities, such as copper, cobalt and iron ore, reaching record prices as economies leap back to life after their pandemic-induced recessions. Investors in Big Oil and Big Mining were delighted. The food rally has been largely ignored.
While rising food prices are good news for farmers and food traders and exporters, they are really bad news for the billions of people in low-income countries. In the United States, households spend less than 10 per cent of disposable income on food, according to the U.S. Department of Agriculture. The share has declined steadily since 1960, when the figure was 17 per cent.
The price increases have been astonishing. The UN Food and Agriculture Organization (FAO) food price index, which tracks international prices over five groups (meats, dairy, cereals, vegetable oils and sugar), has climbed for 11 months in a row, taking it to the highest level since 2014. The April reading was up 1.2 per cent over March, pushing up the year-on-year rise to almost 31 per cent; it is now only 12 per cent below its record peak in early 2011.
Sugar, up almost 60 per cent, and maize (corn), up 67 per cent, showed the biggest yearly increases. In the United States, where much of the corn crop is used to make ethanol – a massive food-to-fuel diversion that low-income countries have blamed for pushing up prices – corn rose 83 per cent in a year.
The FAO index itself does not tell the whole story. Food inflation in some countries is dire, especially in those where the economy is falling apart and the currency is losing value. One is South Sudan, where the currency has collapsed. The FAO says the nominal prices for maize and sorghum have doubled in a year and are up 50 times since mid-2015. Pandemic-related supply disruptions also helped to push up prices.
In Zimbabwe, yearly food inflation in April was almost 220 per cent. In Nigeria, it was 23 per cent, the highest in 16 years. The rest of West Africa recorded similar increases.
Why is this happening? It’s hard to generalize, since specific regions have specific problems. Sugar prices are being propelled by a slow harvest in Brazil and frost damage in France, both of which have squeezed global supplies. Currency devaluations in some countries have pushed up local prices dramatically. A surge in Chinese wheat purchases, and possible hoarding of other food commodities, have propelled wheat prices. Climate change – more droughts and floods – has made harvests more unpredictable.
Farming is highly energy intensive and rising oil prices – up 115 per cent in the past year – have no doubt helped to lift prices, as they did in 2007 and 2008, when oil went to record levels. But today’s oil price is still only half of what it was back then, so the recent surge is only partly to blame.
The old economic adage that the best cure for high prices is high prices is certainly true. But the food rally could be closer to the beginning than to the end. In a recent report on the commodities “supercycle,” Goldman Sachs said it expects a “structural repricing higher of agricultural products in coming years.”
If Goldman is right, developing and low-income countries are in trouble. Most North Americans and Europeans are wealthy enough to absorb higher food (and fuel) prices. Elsewhere, rising food prices can be catastrophic.
The previous food crisis triggered riots in Egypt, Morocco, India, Indonesia, Bolivia, Pakistan, Sri Lanka and many other countries. Food shortages in central Tunisia unleashed protests that would morph into a revolution that started the Arab Spring revolutions in 2011. Food riots hit Venezuela in 2016 and 2017, when falling oil prices pushed the once wealthy economy into crisis.
Rising commodity prices are far more likely to damage the developing world than the rich world, all the more so if they fuel general retail inflation that has to be met with aggressive interest-rate hikes, as seems likely in Brazil, where consumer prices are galloping ahead and the central bank is tightening. The combination of rising interest rates and rising food prices is not pretty, and could take more than a few struggling countries to breaking point. We’ve seen this scenario before.
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