Tuesday, April 26, 2011

Grim Report on Food From the Asia Development Bank

But the reasons may have less to do with to do with production than economics

The Asian Development Bank, in a report issued Tuesday, is warning that global food prices, which have skyrocketed by an average of 30 percent year on year, gross domestic product growth for some food-importing countries "could be choked off by up to 0.6 percent."

Combined with a 30 percent annual increase in world oil prices, GDP growth could be reduced by as much as 12.6 percent, tipping nearly 65 million additional people into poverty in developing Asia, according to the report, titled Global Food Price Inflation and Developing Asia.

The question is why this is happening. There have obviously been localized weather problems in some areas, including drought in China’s wheat-growing areas – which was broken before it did real damage to crops – as well as floods in Pakistan and other regions.
But two of the world’s biggest countries have come through largely unscathed. China announced on March 10 that it expects a record grain harvest despite the drought, making it the country’s eighth successive annual record harvest, at 546 million metric tons of grains. In addition, India announced on April 6 that it would harvest an estimated 235 million tons of foodgrains in the crop year ending in June, an all-time record, which is expected to turn India into a grains exporter.

In addition global rice production, which feeds a huge population in Asia, has been outpacing demand since the 2004/05 crop year, the seventh straight year of surplus production. Demand growth for rice has averaged only 1.1 percent over the past 10 years. Soyabean production is expected to rise by 4.1 percent year on year, reaching 269 million tons while consumption, even though rising slightly faster, will reach 268 million tons, just below production.

The ADB report blames production shortfalls due to bad weather as well as structural and cyclical factors at play during the 2007-2008 food crisis. In particular, the report says, the world is coming off one of the worst El Nino-La Nina in recent decades. As well, the report says, "supply-side factors include competing use of food grains, especially corn and rapeseed oil, to produce biofuel; urbanization and diversion of agricultural land for commercial purposes; increasing scarcity of fresh water for irrigation; low crop yields, rising input costs, and neglect of investment in agricultural technology, infrastructure, processing facilities, and agriculture research and development."

In fact, however, there appears to be plenty of land available for planting. Brazil, the Congo, Sudan, Angola, Columbia, Argentina and Bolivia, according to the FAO, have surplus land for planting. Brazil could bring 163.65 million hectares into production without touching the Amazon rainforest, and still leaving 150 million hectares for pasture land. Argentina has 38.2 million hectares of extra land available for planting. Angola has large resources of fresh water and substantial unused land. Russia and the Ukraine still have 41.3 million hectares and 6.3 million hectares respectively that were taken out of production 20 years ago with the collapse of the Soviet Union. Central Africa, Kazakhstan and Australia all have surplus land for planting.

Actually, it appears, the escalation in food prices instead has to do with economic factors more than anything else. Dr Jim Walker, the head of the Hong Kong-based market research firm Asianomics, puts the blame at the door of US Federal Reserve Chairman Ben Bernanke and other central bank heads across the world for flooding the world with loose money and particularly on Bernanke for QE2, the quantitative easing that got underway in mid-2010. In his April 13 report, Dr Walker reproduces the following chart from Bloomberg:

"There is no doubt in our minds that Fed, and other global central bank policies, are at the heart of the surge in global commodity prices that are ruining the lives of millions of poor people," Walker writes, "even if much of the pass-through is the result of inept monetary policies run in emerging markets themselves. And this on top of the life-ruining zero interest rate policy that has denied countless American, European and Asian savers and pensioners of their hard-won interest income, means that Mr Bernanke really does have a lot to answer for."

The continuing devaluation of the US dollar against other currencies has also played a role, along with panicking governments and over-eager investors. Now, with the worse of the El Nino-La Nina cycle over for now, alarmist investors will probably start to settle down, according to . commodities specialists such as Hugh Peyman, the managing director of the Shanghai-based Research-Works market research firm.

That doesn’t mean life is going to get much better for the world’s poor right away. Whatever the factors that led to the spike in prices, they have been very real. Global rice prices increased by 16.8 percent between June of 2010 and February of 2011. International wheat prices rose by 99.6 percent in the eight months to February. Food price inflation has reached double digits in Bangladesh, China, Indonesia, India, South Korea, Pakistan, Sri Lanka and Vietnam, according to the ADB report.

Food inflation in January was running at 10.3 percent, 12.0 percent in South Korea and 11.1 percent in Vietnam, according to the report. Food price inflation in the past has played a major role in bringing down governments, and it could well again.

The Food and Agriculture Organization of the United Nations lists Afghanistan, the Kyrgyz Republic and Pakistan as among those countries that will experience severe localized food insecurity "in part due to factors such as social unrest and ethnic conflicts. "

The economic prospects because of food inflation, also driven in part by a 39.9 percent annual increase in the price of Brent crude to February, are not optimistic in a world economy that is still fragile because of the 2008-2009 global financial meltdown. Countries across Southeast Asia that have in the past exported their way out of trouble will find difficulty doing that again over the next couple of years. Given the unrest making its way across the Middle East, the prospects for even higher crude prices can’t be ruled out.

"As with the 2007-2008 episode, rising global food prices are being transmitted into higher domestic food prices," according to the report. "For countries that are not heavily reliant on imports, market conditions = local crop conditions, supply costs, and policy measures -- are among the important determinants of domestic food prices. For the poor, volatility in local food prices is more relevant than movements in global prices, since the actual price they have to pay is in the local price."

That is why, when prices grow volatile, government leaders do not sleep well.
by John Berthelsen

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