Monday, 19 May 2008

The Year Of Hunger

How will 2008 be remembered in the future? As we head towards the point half way through the year, events are already starting to take shape. 2007 saw the increase in world food prices of 37%, which have continued to rise during 2008 (up to another 20% so far this year). It would appear that the rising cost of basic foodstuffs is likely to be a key issue this year.

The rise in food prices has been the result of a combination of three factors. First, on the demand side, rising incomes in Asia – and in India and China in particular – have increased demand for foodstuffs. More grain, especially rice, is demanded for human consumption. Additionally, as incomes increase, so does the demand for meat, which in turn increases further the demand for grain to be used as animal feed. One of the consequences of globalisation has been the rising incomes that are now being constrained by rising prices. The situation is exacerbated by the drive towards bio-fuels – particularly in the US. The US policy on bio-diesel is now starting to distort the global market for maize (corn in the US) and add to the volumes of grains demanded.

Second, on the supply side, as a reaction to rising food prices, a number of producer nations have imposed restrictions on their grain exports. Argentina and Ukraine are restricting the export of wheat, whilst India, Vietnam, and Thailand are restricting exports of rice. These restrictions on the supply of foodstuffs are acting to tighten further a market that is already tight. On top of this, a number of natural disasters have served to ensure that world food prices remain tight later in the year. For example, Cyclone Nargis is responsible for the salination of the rice paddy fields of the Irrawaddy Delta, which will transform Burma from being a net exporter of rice to being a net importer of rice in 2008.

The third factor has been the market distortion caused by speculation in the futures markets for soft commodities. The Washington Post describes food as “the new gold”. It states that “Investors fleeing Wall Street's mortgage-related strife plowed hundreds of millions of dollars into grain futures, driving prices up even more.” (See article). This has served to push world food prices even higher.

The impact of high and rising food prices are now being felt around the world. In the developed world, rising food prices – combined with rising energy prices - have led to the return of inflation as a policy issue. This has given the monetary authorities something of a dilemma. On the one hand, the credit crunch would call for a loosening of monetary policy, whereas, on the other hand, the return of inflation would call for a tightening of monetary policy. If the monetary authorities get the policy response wrong, there is the clear prospect of the return of stagflation in the G7 economies. Potentially, if inflationary expectations are rekindled, it could take half a generation to resolve that issue.

In the developing world, we can now see the effects in terms of popular discontent. Food riots have already removed the government of Haiti. As the food crisis progresses, we can reasonably expect further popular discontent – particularly in those nations where rising food prices are likely to lead to mass hunger. The Economist estimates that a billion poor urban consumers – one sixth of humanity - will go hungry this year (see article). The prospect of a series of destabilising political events across the globe is a factor that is likely to make 2008 a much riskier time in which to do business.

This is why we are starting to think of 2008 as the year of hunger.

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