Monday, February 21, 2011

Is the Food Crisis Real?

Or is it another bout of government panic and market manipulation?

What is going on with global food prices? Last week the World Bank, in its Food Price Watch, warned that they have hit dangerous levels that could contribute to "macro vulnerabilities" including political instability.

Some 44 million people in the developing world, where typically half of family budgets go into food purchases, have been pushed into extreme poverty, according to the World Bank’s report. As governments raise interest rates in the effort to keep food price inflation in check, they face the problem of choking off economic growth in the wider economy at a time when the world and the region are still recovering from the 2008-2009 global financial crisis.

But how much of this is real and how much is panic and market manipulation? Two weeks ago, for instance, Indonesia announced it would increase its stockpiles to 2 million tonnes, with Hatta Rajasa, the Coordinating Minister for the Economy, telling reporters that because the rest of the world is increasing its stocks, Indonesia must as well. That calls up images of 2007, when rice-exporting governments locked up their warehouses to the outside world and drove rice prices from US$300 per tonne to US$1,100 in six months before prices collapsed back to about US$550 per tonne when the world came to the realization that there was no rice crisis at all.

There are signs that it might be happening again. Wheat prices are up 74 percent over the last year, corn up 92 percent.

At the G20 meeting of finance ministers and central bankers on Feb. 18 and 19, the participants "discussed concerns about consequences of potential excessive commodity price volatility and asked our deputies to work with international organizations and to report back to us on the underlying drivers and the challenges posed by these trends for both consumers and producers and consider possible actions," according to the official communiqué issued by the body at the close of the session.

Whether that is enough to keep governments in line is a good question. But it appears that surveys by the Food and Agriculture Organization of the United Nations and other organizations, there is enough food around. In many countries in Africa, the World Bank pointed out in its food price watch, maize, sorghum, millet and cassava have all enjoyed good harvests, allowing domestic substitution away from imported wheat and rice in some of the most vulnerable countries. Global corn yields are up 5.1 percent over the last year

The weather has taken much of the blame for the psychological effect, with television showing pictures of floods in Australia and Pakistan, fires in Russia and drought in China and other problems. Floods and wet weather have driven the price of red chilies in Indonesia to US$15 per kilogram from US$2.2/kg, a jump of 600 percent, causing problems for politicians amid citizen outrage. President Susilo Bambang Yudhoyono urged citizens to grow their own in their gardens. But in fact, while the images are spectacular and some of the blame has to go to extremes caused by climate change, the weather hasn’t had that much effect on various crops.

The current La Nina, the flip side of the El Nino coin which causes wet weather in ENSO, as the El Nino Southern Oscillation is known, is almost exactly in the middle range of the last 13 versions of the weather phenomenon, with six with lower temperature peaks and six with higher ones. It only became a fully-fledged La Nina in December. It is believed to have turned mild in January and is expected to end in May or June, according to the Australian Bureau of Meteorology. However, it is undeniable that Indonesia’s palm oil production has been hit by bad weather.

The world wheat crop, which has drawn the biggest concern because of the Russian, Australian and Pakistani weather situations, actually hasn’t been hurt that badly, according to data supplied by a Shanghai-based research firm that specializes in commodities. Australia’s crop is expected to come in at 24.4 million tonnes, with 10 million tonnes downgraded to feed quality. Argentina’s crop is expected to exceed forecasts. While Kazakhstan's crop has been affected by drought, exports could still exceed predictions because the country has 3.5 million tonnes in storage. China’s crop has undoubtedly suffered from drought in key wheat-producing states as Pakistan’s has suffered from floods.

Rice provides an interesting economic window to the problem. Very little rice is traded on international markets, so what happens domestically provides a clear yardstick. In Vietnam, one of the world’s biggest rice exporters, the price rose by 46 percent between June and December according to the World Bank. But it is primarily because of the 7 percent depreciation of the Vietnamese dong, which has fueled inflation. International exporters have expected demand to rise, driving up futures prices and causing the government to raise the minimum export price.

That plays out against the fact that both Thailand and Vietnam have enjoyed good harvests and, the World Bank says, "the fundamentals in the supply situation in the rice market remain strong."

There are several policy implications in the recent round of price rises, the World Bank says. "There are certain key commodity markets, such as rice, where informational uncertainty and panic buying may keep prices from falling to the levels expected by the good harvests."

Thus it could indeed be 2007 all over again. Written by John Berthelsen

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