Hungry for a Solution to Rising Food Prices

Hungry for a Solution to Rising Food Prices - BusinessWeek

• As the Tunisian dictator Zine el Abidine Ben Ali discovered in January, there is no surer route to political oblivion than to deny people access to affordable food.



• The riots that ensued—propelled in part by anger over high food prices—drove Ben Ali from power and spread to Egypt, Jordan, Yemen, and Algeria. Ben Ali may be remembered as the despot who was toppled by a vegetable cart.



• The deluges in Saskatchewan were so sustained and intense that farmers couldn't plant some 10 million acres of wheat, according to the Canadian Wheat Board. "What is typically the driest province was never wetter," said the governmental agency Environment Canada.



• Chicago Board of Trade up by 74 percent in the past year.



• Corn traded in Chicago rose by 87 percent during the same period.



• grain prices have spiked even higher because of yet another drought, this one threatening China's wheat crop, the world's largest. In that country's eight major wheat-producing provinces, some 42 percent of winter wheat cropland has been hurt by a dry spell, according to Agriculture Minister Han Changfu.



• "Whenever you get the market as tight as we are now, hoarding becomes widespread," says Abdolreza Abbassian, a senior economist at the FAO. Wheat prices may keep rising until the summer, he predicts, because importers are speeding up purchases to outrun inflation. Prices are more likely to stay high or go higher in the next six months, he adds, than to decline.



• You need two perfect harvests through the summer of 2012 to get stockpiles back to an acceptable level," says Jason Lejonvarn, a commodities strategist at Hermes Fund Managers in London.



• a Chinese ban on wheat exports would also send prices higher, meaning that global grain shortages—once thought to be a disaster of the past—could return. Even American commodities buyers are feeling the pinch. "There is not one crop you can point to that is without supply problems," says Steve Nicholson, a commodity procurement specialist for International Food Products in St. Louis. "Production is not keeping up with demand."



• the crisis is a test of mankind's ability to feed itself



• the era of predictable abundance that fueled the world's population growth to almost 7 billion people may be over.



• Yet rising global food prices have pushed 44 million more people into extreme poverty in developing countries since June, the World Bank says. "Global food prices threaten tens of millions of poor people around the world," World Bank President Robert Zoellick said in a Feb. 15 conference call. "The price hike is already pushing millions of people into poverty and putting stress on the most vulnerable, who spend more than half of their income on food."



• "In many of these emerging markets, two-thirds of the consumer price index is essentially food, energy, and transportation," New York University economist Nouriel Roubini told Bloomberg News in January.



• "We are a food-abundant country and the last place where food inflation is going to rise," says Erick Erickson, an economist at the Washington-based U.S. Grains Council.



• That's because in those countries, consumers pressed by food costs are more likely to get pay raises, says Karen Ward, senior global economist at HSBC in London. Once inflation creeps into wages, it quickly becomes general. China, with nearly double-digit economic growth, is an example. Chinese consumer prices rose 4.9 percent in January from a year earlier, the government announced on Feb. 14, while food costs rose 10.3 percent.



• In low-demand, high-unemployment economies such as the U.S., workers can't get higher pay to cover their rising food bills, so they cut back on other kinds of spending. Companies, too, are forced to eat their higher costs because they know raising prices will kill sales. In a weak economy, higher commodity prices are "like a further tax on your growth," says HSBC's Ward.



• The question is whether Wall Street speculators are making commodity prices rise faster. At the height of the housing and stock market bubble that burst two years ago, speculators were accused of pushing up crude oil prices—to a peak of $147 per barrel for West Texas Crude in 2008—without regard to supply and demand. This led to calls for regulation that weren't answered until the Dodd-Frank financial reform bill gave new marching orders to the U.S. Commodity Futures Trading Commission.



• the commission in January proposed stricter position limits, or rules on how many futures contracts investors can own at one time.



• Traders say they don't boost prices, because trading is a zero-sum game: For every buy, there's a sell. "Speculators will flock to a good, compelling, fundamental story," says Gary Mead, an analyst at VM Group in London. "If you take away that good, compelling, fundamental story, speculators will look at something else. In this low-interest-rate environment, they're searching for yield in whatever shape. Right now, it happens to be commodities."



• A record 43.6 million people in the U.S.—more than one of every eight—received food stamps in November, as the jobless rate stayed near a 27-year high, the USDA reported. In most parts of the developing world, there is no comparable safety net, which is why national leaders and nongovernment organizations alike are scrambling to devise solutions before the worst comes to pass.



• Beijing will spend 12.9 billion yuan ($1.96 billion) to bolster farm production and fight the dry weather. Benjamin Wey, founder and president of New York Global Group, an advisory firm in Beijing and New York, predicts that the Chinese government, to avoid social unrest, will impose food price controls, making producers and distributors whole through subsidies.



• Agriculture Minister Mykola Prysyazhnyuk urged the World Bank to create a world grain bank "to safeguard the global food supply … and to avoid unrest and to avoid fear."



• Bank President Zoellick also recommends targeted government aid for the poor, such as school lunch programs, and a free-market approach to price volatility, with governments promoting transparency and preventing restrictions on the flow of food.



• Scientists have been warning for years that carbon emissions from cars, planes, factories, and power plants would make the global climate warmer and more chaotic—altering weather patterns to make some places more prone to drought and others more prone to floods. And climate campaigners have been wondering for years what it would take to galvanize the U.S. and other nations into action.



• "There is an increasing likelihood of a food crisis globally," he said, "due to climate change." Business leaders are equally frank. "The fact is that climate around the world is changing," says Sunny Verghese, chief executive officer at Olam International, among the world's three biggest suppliers of rice and cotton. "That will cause massive disruptions."



• The current series of droughts and floods are not simply wreaking havoc on food supplies. They're harbingers of life in a hotter and more chaotic climate. Could hunger, and the threat to power that accompanies it, be what finally forces political leaders to act?

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