Tackling the World Food Commodity Crisis

The attention of the world is focused on the food commodity crisis with the recent UN Food and Agriculture Organisation (FAO) sponsored summit in Rome.

With food commodity prices reaching 30 year highs after inflation, and with food inventories at around 60-year lows, a number of food riots have broken out across the globe.

Just consider that in the eight years to 1947 cocoa prices increased by about 1,000%, while in the 7 years to 1947 soybean oil (759%) and pork bellies (797%) showed huge price increases.

So there is some historic precedent for these huge surges in food commodity prices.

At this summit the UN Secretary General, Ban Ki-moon called on the world to take this historic opportunity to address the world food commodity crisis by revitalising agriculture.

Mr Ban reckons the global economy needs to invest about $15 bn to $20 bn each year to increase production, given that world food production needs to increase by about 50% by 2030 to meet the expected demand.

As a short term measure the UN will make an extra $1.2 bn available to the World Food Programme for food aid to help 75 million people in the 60 countries most affected by this food commodity crisis.

Some of these poorer nations have seen their food import costs rise by up to 40% this year.

The UN FAO says the industrialised countries must:

• Transport food to where it is needed and increase aid to poorer nations
• Eliminate trade barriers ( a call echoed by Robert Zoellick, Head of the World Bank) which include import tariffs and export restrictions
• Encourage an increase in yields in smallholder production

Looking ahead

With the price of wheat doubling in the last twelve months, and by 500% over the last 8 years or so, and rice (up 70% in last 12 months) and coffee at 10 year highs, we may be leaving an era of relatively stable prices.

To understand how to address this commodities prices problem, policymakers are looking at the current causes of the problem. General consensus is that this profound change is down to 3 main causes:

• Growth in world population, which is estimated to reach about 9 billion by mid-century, is causing massive pressure to be applied on other resources used in food production, namely oil, land and water. Family planning issues may need to be considered to alleviate the strain.
• The very robust economic growth in the emerging economies such as China and India, where there is a growing core of affluent population who are eating more meat and processed food. Higher meat consumption leads to higher use of grains and the other commodities such as oil and water.
• A significant shift to using grains and oilseed for biofuels production such as bioethanol. In fact ethanol production may use up to 30% of US crops by 2010.

  With alternative energy fuels and food competing for limited resources, inevitably commodities prices are driven higher.

  There is concern that US Government policy is distorting the market because of incentives for ethanol producers.

  And the International Food Policy Research Institute claims that biofuels have contributed about 30% to food price increases.

UN FAO and OECD Outlook Report

A joint report by the UN FAO and the OECD says prices should moderate over the longer term, however, it predicts beef and pork prices could be 20% higher by 2017, while wheat (up 60%) and vegetable oils (up 80%) are also expected to rise.

The report cites as key factors the supply and demand dynamics, climate change impact, the ongoing energy costs and speculation in the commodity futures markets.

Significantly, the report used a crude oil price of $104 in its projections. In view of recent price action in the futures markets, this projection looks rather optimistic.

Articles on agricultural commodities:

Sugar

Coffee

Wheat

Corn

Soybean

Cocoa

Food Commodity Prices

Where now?

A look back to the 1970’s, however, shows that commodity price surges are not uncommon, such as when cocoa prices jumped by 1,106% in about 5.5 years to July 1977, or the 8 year surge in coffee prices (1,044%)ending in April 1977.

The commodity futures markets are reflecting the concerns of producers and commercial buyers and it may be an easy target to blame this food commodity crisis on speculation.

While there is no doubt an element of speculation, as in all types of markets, the world economy needs to take heed of the main three issues: population growth, economic growth and use of biofuels and steer away from this food commodity crisis.

With a measured response and the avoidance of knee-jerk actions the food commodity markets will likely stabilise in the medium term.

Careful use of new technology such as GM and conservation of scarce resources such as water, together with removal of trade barriers should help bring the system back to equilibrium.

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