Do we face another food price crisis?

Global food prices are on the rise again as drought hits US harvests. Until governments address the issues of biofuel mandates and export controls, writes Rob Bailey, a spike threatens to turn into a crisis.

International food prices are on the rise again. The United States, the world’s largest producer of corn and soybeans, is in the midst of its worst drought for half a century. Harvest forecasts are being revised down continuously, triggering alarming run-ups in the price of both commodities. Earlier this month, both passed the peaks they reached during the 2007-2008 food price crisis. At this point it is too early for climate scientists to say whether climate change made this particular drought more likely, but it may well have done. It will almost certainly make such events much more likely in the future.

The concern now is that the supply shock will be enough to tip agricultural markets into a vicious circle of rising prices and declining confidence. This may happen if governments start to panic-buy and hoard, or worse, impose export controls on their agricultural sectors to appease angry populations, driving up international prices further and encouraging others to follow suit. This dynamic was a major contributor to the 2007-2008 crisis, which saw riots in more than 30 countries and left the international humanitarian system hamstrung, caught between spiralling demand for emergency food aid on the one hand, and high food prices on the other.

It was also behind in the 2010-2011 price spike, when Russia and the Ukraine imposed export bans following a devastating heatwave that wiped out large swathes of the Black Sea wheat harvest. The vertiginous rise in wheat prices that followed provided a crucial spark for the early protests in North Africa, which eventually became the Arab Spring.

The good news is that globally the two commodities most susceptible to export bans, wheat and rice, are expected to post good harvests this year. If the price spike remains primarily confined to corn and soybeans then a global crisis is unlikely. Food riots, such as those that occurred in 2008 or 2011, are more often associated with the price of rice or bread (made from wheat flour), commonly crucial expenditures for poor households.

However, there is a chance that the price spike will spread, rippling from one crop to another as consumers switch between commodities as prices rise. And worryingly, there are signs of contagion: wheat prices are on a strong upward trend – rising over 50% in just over a month – probably as traditional corn users in the livestock sector switch to wheat as a cheaper alternative for animal feed. A poor wheat harvest in a key exporting region, such as the Black Sea or Australia, would be precipitously destabilising. The most vulnerable countries to spiking wheat prices remain those of North Africa and the Middle East, as well as Pakistan.

Because corn and soybeans are primarily used in animal feed, price rises in these commodities are less associated with increasing poverty and unrest. Poor people cannot afford to eat meat and so are less affected; rich people can reduce their meat consumption without risking starvation. There are exceptions to this of course, most notably Mexico, where white corn is the national staple and a crucial component of poor household expenditures. Though it is the slightly different US grown yellow corn currently facing a major supply shock, price rises could easily be transmitted from one to the other if livestock producers seeking cheaper feed switch from yellow corn to white. This is precisely what happened during the 2007 tortilla crisis, when thousands of protestors took to the streets in Mexico City.

Another emerging economy that has cause for concern is China. Although poor Chinese depend primarily upon rice, a growing middle class has a taste for pork – from pigs fed on imported soybeans. China is now the world’s largest producer of pork and its largest importer of soybeans, higher prices of which will contribute to inflationary pressures within the country. The government may choose to make releases from its strategic soybean reserve, which trade data indicate it has been building since the 2007-2008 price crisis, presumably for an eventuality such as this.

One emerging economy currently benefitting is Brazil. It is the world’s second-largest producer of soybeans, and high prices will provide some compensation for the drought that ravaged its previous crop. Remarkably, Brazil has also begun to export corn to the United States as the American livestock sector looks abroad for affordable feed. The US accounts for around 40% of global corn production, prompting one commentator to note that the US importing corn is the equivalent of Saudi Arabia importing oil.

Yet even with this year’s disastrous harvest, the United States will produce enough corn to meet the needs of its livestock and food manufacturing sectors and to supply international markets. The reason that domestic consumption and exports are being forced to adjust is ethanol, which currently consumes some 40% of US corn production. Ethanol’s demand for corn does not adjust – it is set by government mandate so is perfectly inelastic and completely unresponsive to supply shocks, forcing adjustment on everyone else and amplifying price spikes in the process.

The US agriculture secretary Tom Vilsack recently said that he was praying daily for the drought to end. An alternative, arguably more effective, strategy would be to relax the ethanol mandate. Recent modelling by the UK government found that halving the US mandate during a price run-up such as this could reduce the magnitude of the spike by about 40%. Unfortunately Vilsack has rejected this option. It is an election year, and the mandate is too valuable to the politically crucial corn-growing states.

Making biofuel mandates flexible, or preferably abandoning them altogether, was a recommendation made to the G20 last year by a group of 10 international organisations, including the World Bank, IMF, FAO and OECD. Unfortunately governments failed to act on this advice, and also failed to agree rules to limit export bans. So the world remains highly vulnerable to volatile food prices: global food stocks remain close to crisis thresholds and are struggling to recover as demand continues to outstrip production growth, markets remain tightly balanced, biofuel consumption continues to expand and no agreements exist to prevent or limit the unilateral imposition of export bans. As a result, we are only one or two bad harvests away from a crisis. And as climate change gathers pace, each year the chance of one or two bad harvests increases.

Hopefully this spike will not turn into another global crisis, but it must provide a wake-up call. Unless governments get serious about dealing with biofuels and export controls, one thing we can be sure of is another crisis, probably sooner rather than later. And governments will not be able to say they were not warned.

Rob Bailey is senior research fellow for energy, environment and resources at Chatham House. 

This article is published here as part of  Nuclear Enery and Developement Programme, which is supported by the Heinrich-Boell Foundation. 

Homepage image by iowa_corn