Even if the global agriculture crisis doesn't turn cataclysmic, it represents a massive test
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. On Dec. 17, after Tunisian police assaulted a street vendor named Mohamed Bouazizi and seized his produce cart because, according to his family, he couldn't afford to pay bribes, the 26-year-old Bouazizi doused himself with accelerant and lit a match. He died two weeks later. 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 hunger that has roiled the Middle East was not caused by the whims of autocrats and cops. It began last year with crippling drought in Russia and later Argentina, and torrential rains in Australia and Canada. 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. Shrunken wheat harvests in those countries, along with cool, wet summer weather in the American Midwest that delayed the U.S. harvest, helped drive wheat prices at the Chicago Board of Trade up by 74 percent in the past year. Corn traded in Chicago rose by 87 percent during the same period. More recently, 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.
Overall, the U.N. Food and Agriculture Organization in Rome says global food prices surged in January to record levels, based on data reaching back to 1990. "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.
Whether the world tips into agricultural catastrophe this year depends on the fate of the wheat on the North China Plain. "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. Unless sufficient moisture reaches the parched seedlings, a net exporter of wheat could become a net importer of wheat, further stressing world markets. Short of that, 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."
Even if the worst does not come to pass, this sudden fracture in the global food supply represents a massive test—or, more accurately, a series of them.
At the most basic level, the crisis is a test of mankind's ability to feed itself. Industrial agricultural techniques have boosted crop yields and kept food prices low for decades, but the era of predictable abundance that fueled the world's population growth to almost 7 billion people may be over. Relief agencies, already lashed by hurricanes, earthquakes, volcanic eruptions, and government budget cuts, are ill-equipped to handle severe food shortages. 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."
The price escalation is also triggering inflation in the developing world. "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. "When these things rise, it becomes a really significant social cost."
The inflationary impact of the crisis is likely to be more subdued in the developed world. While the U.N. estimates that the poorest countries paid as much as 20 percent more for food in 2010 than in 2009, in the U.S., the world's largest food exporter, retail food prices rose just 1.5 percent last year and will gain as little as 2 percent in 2011, according to U.S. Agriculture Dept. estimates. "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.
Rising prices for food are more likely to boost inflation in countries where growth is strong and unemployment is low. 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.
When demand is strong, as it is in China, companies are more able to pass along their higher costs by raising prices, says Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's Robinson College of Business. 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.
For central banks, rising commodity prices are a conundrum. They create two problems that demand opposite solutions. To combat their effect on inflation, a central bank should raise interest rates. But to compensate for sapped consumer spending power, the bank should lower rates. Which course each nation's bank follows will depend on local economic conditions—and on whether it fears inflation more than it fears recession.
The second great test posed by the global agriculture crisis is to wealthy countries and their financial systems—a challenge to respond in a manner that helps rather than hurts. There's no way to sugarcoat it: What's bad for the global poor has been good for the American farmer and the American investor. The same record food prices that caused riots in Algeria and export bans in India have led to the biggest-ever U.S. farm exports, sending Midwest cropland to record values and boosting profits for rural banks and equipment makers, according to a report by the Federal Reserve Bank of Kansas City. Higher incomes let farmers repay debt in the fourth quarter, reducing delinquencies and increasing profit for lenders. Income for U.S. farmers is expected to jump 20 percent this year, the U.S. Agriculture Dept. said on Feb. 14. Net farm income will total a record $94.7 billion, compared with $79 billion in 2010. Crop values will jump 18 percent, to $202 billion.
As agricultural commodity prices have risen, global investors have been piling into agriculture index swaps, exchange-traded products and medium-term notes. Investments in those products tripled, to $5.7 billion, in the three months ended Dec. 31 from the previous quarter, Barclays Capital said in a Jan. 27 report. New investments in agriculture-related products totaled $2.6 billion in December, compared with $1 billion in November and $1.3 billion a year earlier.
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 CFTC has had trouble gathering accurate data on the derivatives markets, and it remains divided on how to regulate them. In a separate attempt to tame price speculation, the commission in January proposed stricter position limits, or rules on how many futures contracts investors can own at one time. These rules, if adopted, would affect a limited number of commodities and firms. Whether they will do any good remains to be seen.
Even before Dodd-Frank, investment in agricultural futures was subject to CFTC caps—and that alarm bell sounded a warning last week, when Deutsche Bank (DB) closed to investors its PowerShares DB Agricultural Double Long, an ETN based on commodities futures prices that's up more than 65 percent in the past year. A person familiar with the matter said DB feared that the product's underlying investments would soon hit their position limits.
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."
Most American have not benefited from the food crisis. 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.
Chinese Premier Wen Jiabao announced this month that 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. In Bolivia, Finance Minister Luis Arce says a portion of the $10 billion in his country's central-bank reserves should be used to increase loans to food producers and lower prices. The Obama Administration won G-20 backing last October for a billion-dollar Global Agriculture and Food Security Fund to get food aid to needy countries. In Ukraine, once the Soviet Union's breadbasket, 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."
The World Bank has advocated a similar approach, calling for the establishment of small regional food reserves in disaster-prone areas. 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. When the Group of 20 Finance Ministers meet this month, he will ask its members to endorse a code of conduct that would prevent them from limiting humanitarian food aid even if it violates export limits, produce better information on grain inventories in emerging economies, and improve long-range weather forecasts in at-risk regions such as sub-Saharan Africa.
The final test posed by the current crisis is the toughest of all. 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. The newly ascendant Republicans in Washington won't acknowledge the existence of the problem, let alone debate its solutions. But other leaders are speaking up. In South Korea, when President Lee Myung Bak launched a task force to study food shortages, he was blunt: "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."
Civilization has faced down pandemics and world wars—and has emerged stronger for having met the test. 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?