Is another food crisis coming?

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Once again, jitters are spreading through the world of food. Wheat prices have surged a terrifying 50% since early June, the biggest jump in 30 years, according to HSBC. Droughts in Russia, Ukraine and Kazakhstan, which together account for 26% of world wheat exports, are leading to fears of tight supply and super-charging prices. Russia’s government made matters worse by slapping a ban on wheat exports from mid-August. The sudden price spike has a scary déjà-vu feeling, that the world will return to the nosebleed agricultural prices and food riots witnessed during 2007-08. That would not only punish the poor, but also drag on the already uninspiring recovery from the Great Recession.

The fact is, though, that the food crisis never really went away. Though prices for agricultural foodstuffs have decreased from the lofty heights of two years ago, they’re still at higher levels than before that big price spike, even after the damage caused to economic growth, incomes and trade by the Great Recession. Today’s wheat scare is the just latest sign of what could be one of the biggest challenges facing the global economy over the next 20 years – the fight to feed the world. We’re suffering from three decades of neglect of agriculture, a period when the sector was starved of the resources and technology it needs to keep up with rising world demand. And though there is a growing global consensus about the need for a second Green Revolution, we’re really only at the beginning of a long, expensive process of repairing the world’s farms. That means we’re likely to see higher food prices overall over the next decade, and the continued risk of dangerous price fluctuations like the one we’re experiencing now with wheat.

But first things first. Do soaring what prices mean we’re headed for a repeat of the 2007-08 food crisis? Commodities analysts are so far saying probably not. Stocks of wheat are at sufficiently high levels (especially compared to the 2007-08 period), and the coming harvest in other big producers like the U.S. is expected to be strong. So unlike in 2007-08, the supply situation isn’t all that bad, meaning prices for wheat should eventually see reality.

But food isn’t like other products traded on world markets. There’s a lot more emotion surrounding it. No country wants to run out of food or watch sky-high prices dump people into poverty and malnourishment. That can lead to riots and topple governments. So both grain exporters and importers can do extreme things if they think a shortage is coming or prices will keep rising — hoarding, panic-driven purchases and export restrictions. In other words, the reaction of market players can create a crisis when none should exist based on the pure numbers. Here’s HSBC on the matter:

Even if Russia’s wheat crisis, as well as other local disruptions, may not be in themselves sufficient to lead to significant global food price inflation, an adverse policy response can still drive costs up quite significantly…It is essential to monitor policy responses over the coming weeks of the world’s major wheat traders, especially exporters, but also importers that may be pushed into aggressive purchases to secure supplies.

But whatever happens to wheat over the next few weeks, food is still expensive by the standards of recent history, and is likely to stay that way. The Organization for Economic Cooperation and Development and the Food & Agriculture Organization spelled that out in a June report. Their outlook sees average wheat and coarse grain prices between 15% and 40% higher in real terms (adjusted for inflation) over the next 10 years than their average levels during the period between 1997 and 2006. Real prices for vegetable oils are projected to be more than 40% higher, while dairy prices are forecast to be on average between 16% and 45% percent higher.

Though at those prices, we’re not at the incredibly high levels seen during the 2007-08 price boom, food markets are nonetheless still going to be vulnerable to unpredictable and damaging price fluctuations. Here’s more from the OECD/FAO report:

The surge in crop prices to near record highs in 2007/08 was due to the contemporaneous occurrence of a panoply of contributing factors, which are not likely to be repeated in the near term. However, if history is any guide, further episodes of strong price fluctuations in agricultural product prices cannot be ruled out nor can future short-lived crises.

So why will prices stay high and volatile? There are a ton of structural problems in the world of agriculture that have made the balance between supply and demand much more precarious than it has been since the 1970s. On the production side, we just haven’t seen the cash going into rural infrastructure or technological research that we need to keep yields growing. On the consumption side, all those newly wealthy Chinese, Indians and Brazilians can now buy more food than they used to, and different types of food – more meat, for example, which means more grain gets turned into livestock feed instead of people-feed. Add in the new demand for biofuels, and what you get are high prices for food. More from HSBC:

World agricultural markets have become so finely balanced between supply and demand that local disruptions can have a major impact on the global prices of the affected commodities and then reverberate throughout the entire food chain. As a result, prices for staples such as wheat, rice, soybeans, and pork, have risen on a trend basis since around 2004 and, more importantly, have become extremely volatile over the years. This reflects structural factors, such as prolonged underinvestment in agricultural technology, rampant demand growth in emerging markets, environmental degradation, the growing reliance on bio-fuels, and, possibly, the rising influence of financial markets, including exchange rate movements.

How can we fix this problem? With mega-bucks, over a very long period of time. Many countries – from India to Senegal – have woken to this fact and are devoting more resources to agriculture. But more investment is needed. The OECD/FAO report makes that clear:

World population is expected to grow by 2.3 billion people between 2009 and 2050 with nearly all this growth from developing countries…It is estimated that feeding a population of 9 billion would require a 70% increase in global food production between 2005-07 and 2050. Production in the developing countries would need to almost double…To support the necessary expansion in output in developing countries, FAO estimates the required average annual investment in primary agriculture and necessary downstream services (e.g. storage, processing) at USD209 billion in 2009 prices (or USD83 billion net of depreciation), much of which would come from private sources. Still, this amount represents a 50% increase from current levels and does not include the public investments required in such areas as roads, irrigation, electricity and education.

So even if we may not be looking into the mouth of a food crisis at this moment, if we don’t do more to support food production, we will run the risk of facing one in the future. And along the way, the chances of damaging price spikes will always be lurking. Enjoy your lunch! While you can afford it.