Skyrocketing Food Prices: A Global Crisis

▪ 2009

by Janet H. Clark

      As the year 2008 got under way, upwardly spiraling food prices became of increasing concern to international organizations and relief agencies, national governments, and consumers everywhere. UN officials speculated that the crisis could add an additional 100 million hungry people to the billion already living on less than a dollar a day, the common measure of absolute poverty. The impact of rising food prices was greatest in less-developed countries (LDCs), where spending on food accounted for 40–60% of income, compared with about 15% in industrialized countries.

      Even in industrialized countries, poor families were being severely affected by a general rise in prices, especially when combined with an economic downturn and higher unemployment. Food prices in the 30 Organisation for Economic Co-operation and Development (OECD) member countries rose by 7.2% year on year in both July and August, the biggest increases since 1990, and in the U.S. the Department of Labor reported that grocery-store food prices rose by 6.6% in 2008, the largest increase since 1980.

      With spiking food costs came a growing threat to food security, which provoked political repercussions in many LDCs. In Haiti, for example, food riots led to the ousting on April 12 of Prime Minister Jacques-Édouard Alexis, and the lack of a replacement until July left the government in a state of paralysis while social and economic conditions continued to deteriorate.

      Prices of staple foodstuffs escalated alarmingly on world markets. In the first half of the year, the price of internationally traded food commodities, led by grains, rose by 56%. In the first quarter alone, the prices of wheat and corn (maize) rose by 130% and 30%, respectively, over the same period a year earlier, while the cost of rice climbed 10% in both February and March. By midyear the price of corn, wheat, and soybeans had more than doubled, while that of rice had tripled.

      A number of factors contributed to the increases in food prices. One was the economic emergence of China and India, whose populations were becoming increasingly affluent and thus boosting their food consumption; in China annual per capita consumption of meat rose to 54 kg (about 119 lb) from 20 kg (44 lb) in 1985. Another major factor was the increased output of biofuels made from grains and oil seeds in the U.S. and the European Union, where there were generous—and controversial— tax concessions or direct financial support for producers, retailers, or users of biofuels. In July an OECD report strongly criticized these incentives as costly and ineffective and recommended that governments refocus their policies. Partially associated with this was the restrictive and trade-distorting effect of a high level of government support to farmers in many OECD countries, which in 2007 amounted to $258 billion, or 23% of farm incomes. A surge in petroleum prices led to increased fertilizer and transport costs. In many countries adverse weather led to crop failure, speculation on international commodity markets, and hoarding. When Cyclone Nargis struck Myanmar (Burma) on May 2, it generated a 4-m (12-ft)-high storm surge that devastated the rice-producing Irrawaddy Delta. During August–September, Haiti, already suffering from food shortages, was battered by four successive hurricanes. The depreciation of the U.S. dollar against the euro and other currencies early in the year contributed to the rise in dollar-denominated commodity prices. The International Food Policy Research Institute (IFPRI) estimated that 15–27% of the increase was from the dollar's decline. At the same time, countries in Asia and the Middle East that linked their currencies to the weakening dollar experienced overheated economies and suffered higher prices than countries with more flexible exchange rates.

      The World Food Programme (WFP) was the main distributor of emergency food relief, with activities in more than 75 countries. In March, however, the organization announced that it was short of money because of the soaring price of cereals and other foodstuffs. At the June UN heads of government meeting, the WFP reported that it had received $1.2 billion in aid, including an unexpected $500 million from Saudi Arabia. Among 60 low-income food-deficit countries surveyed early in the year by the Food and Agriculture Organization (FAO), the most widespread response was to remove or reduce import tariffs on food. This was especially true in South and East Asia, the Middle East, and North Africa. Given that tariff levels on cereals and vegetable oils were already relatively low, however, at 8% and 14%, respectively, only small proportions of the price rises were offset.

      In the Middle East drought reduced the summer harvest, and many major wheat-producing countries, including Iran, Iraq, and Syria, were forced to increase imports. In Saudi Arabia the inflation rate soared to 10.6% in the year to June, its highest rate in 30 years, and wheat production was extremely costly because of huge farm subsidies. The Saudi government decided in August that it would make economic sense to outsource its farming and was considering the purchase of rice farms in Thailand through a new investment fund set up to buy agricultural land overseas. United Arab Emirates investors looking for land for agricultural development favoured Pakistan, Kazakhstan, and The Sudan.

      In early May, Prime Minister Samak Sundaravej of Thailand (the world's biggest rice producer) proposed the formation of a cartel of Southeast Asian rice-producing countries (including Vietnam, Myanmar, Laos, and Cambodia) to be set up along the lines of OPEC. Laos and Cambodia favoured the idea, but there were strong protests in the Philippines, the world's biggest rice importer. In August, Thailand announced plans to boost rice production by leasing 160,000 ha (395,000 ac) of unused state land to poor farmers and agribusiness for biofuel crops, sugar cane, palm, and rice. A more novel way of easing food shortages was proposed in July by scientists at the National Autonomous University of Mexico; they asserted that insects, which were nutritious and already provided part of the diet in 113 countries, should be consumed more widely. Thailand, where cricket rearing for food was already practiced by many families, hosted an FAO conference to examine the benefits of insects as a food option.

      At an EU summit in July, member countries were divided on trade reform and the need to remove agricultural subsidies and reduce protectionism. For the first time, in 2008 the EU did not use the portion of its agricultural budget designated for buying and stockpiling surplus produce. The resulting unused funds, expected to reach €1 million (about $1.4 million), were to be given to farmers in LDCs. Cut-price discount stores, which were already popular in the U.S., were proliferating in Europe and putting pressure on the more costly chains. The search for cheaper food was gathering momentum even in U.S. cities, where there was a resurgence of freegans who scavenged through supermarket garbage bins and other sources of discarded food. (See Special Report (Freegans-the Ultimate Recyclers ).) In Japan, which had suffered a decade of deflation, prices rose 2.4% over the year to July, mainly because of higher prices for essential foods and gasoline, and food shortages were increasing for the first time in 40 years.

      Despite the widespread fear of a continuing rise in global inflation and the number of people needing food aid, the failure to reach agreement on trade liberalization left agricultural producers in LDCs at a continuing disadvantage. The IFPRI calculated that if export bans by some 40 food-exporting countries were lifted, cereal prices would be 30% lower on average. Two small signs of hope emerged in September. Corporate and government leaders attended the first UN Private Sector Forum on Food Sustainability and the Millennium Development Goals. At the same time, the WFP unveiled Purchase for Progress (P4P), an initiative by which governments and private foundations (notably the Bill & Melinda Gates Foundation and the Howard G. Buffett Foundation) would finance WFP purchases of foodstuffs from small farmers in LDCs, which would thus encourage local food production and offer small farmers better access to world markets.

Janet H. Clark is an editor, independent analyst, and writer on international economic and financial topics.

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