If anything can be reliably forecast amid the growing upheaval in the Middle East and North Africa, it is the direction of global food prices. They have currently settled at record highs and are certain to increase in the future.
According to the United Nations Food and Agriculture Organization (FAO), an index of 55 food commodities rose 2.2 percent in February, the eighth consecutive month that food prices have increased and a record high since 1990. FAO’s cereal price index, which includes main food staples such as wheat, rice and maize rose 3.7 percent in the same month, the highest increase in one month since July 2008. Meanwhile, the International Monetary Fund’s statement that “the world may need to get used to higher food prices” did little to downplay concerns about further price increases. Soaring food prices were among the factors playing into the uprisings in Egypt and Tunisia, further unrest elsewhere in the Middle East and North Africa is only helping to push these prices upward. Sifting through the wider implications of the unrest, among other factors, is crucial in understanding the current world food situation and to get a sense of what is to come.
What goes up…
Food is not the only commodity that’s getting more expensive; one side effect of the “Arab Spring” has been the recent crude oil price-jump to more than $100 per barrel, which will likely serve only to drive up food prices even higher.
Crops were among the commodities that beat stocks, bonds and the dollar in gains for a third straight month. “Probably the most important implication of this oil shock is on financial markets,” said Abdolreza Abbassian, senior economist at FAO.
If oil supply disruption concerns persist, food prices will continue to set records. Uprisings in Libya have already led the African nation to halt its production of 1.6 million barrels per day. Saudi officials’ statements that the country would compensate for Libya’s oil shortfalls calmed markets to some extent but the price impact was limited on fears that Saudi Arabia might exhaust its spare capacity.
“The problem is that transportation costs are up, which trickles down to food prices”, said Simon Neaime, section chief of economic analysis at the Economic and Social Commission for Western Asia (ESCWA).
For grain producers, the oil shock automatically implies higher costs of production. According to a recent report by the Organization for Economic Cooperation and Development, energy accounts for over one-third of grain production cost.
On the macro-economic level, however, it is tightened supply and unforeseen demand that moves food prices upward. The first three months of 2011 saw MENA governments hoarding staple crops in bulk in anticipation of the trouble ahead. In February 2011, the Egyptian government bought 175,000 tons of wheat from the United States and Australia, while Saudi Arabia stockpiled a year’s worth of wheat.
Yet the MENA’s frantic purchases to boost stockpiles had a one-time impact on the market. “All that these countries did was stay on the safe side rather than wait a month or two when food prices would be much higher, or when they [might not] have governments,” FAO’s Abbassian said.
Currency exchange rates are also contributing to high food prices, specifically for imports in the MENA region. “Another factor we are talking about here is the euro,” said ESCWA’s Neaime, who adds that the euro won’t be going down anytime soon. “Many North African countries trade mostly with the [Eurozone]. Whenever the euro is appreciating, they are importing inflation.”
Fickle weather also remains a long-term driving force behind high food prices. Russia’s ban on grain exports that had started in summer 2010might be extended until year-end 2011. Climate threats are also a factor for 2011; at a March conference on Near East, FAO raised concerns of drought, floods and soil degradation in the region. Meanwhile, the La Nina weather pattern is forecasted to lead to heavier rainfall in the northern United States and Canada, possibly washing out harvests and tightening supplies on corn andwheat.
Weather aside, Japan’s triple disaster is also curbing food supply. The 8.9 magnitude earthquake and the tsunami that followed destroyed close to 20 percent of the agricultural and food industry in Northeast Japan. Meanwhile, the nuclear crisis that resulted from Japan’s Fukushima reactor meltdowns led to food restrictions on Japanese exports. The US, Australia, Singapore and Hong Kong banned food imports from some regions of the country after high levels of radioactive iodine were detected in some samples.
…Must come down?
Among the downward price pressures on food are the expectations that spring wheat crops will boost supply. “Wheat is one crop that is easier to predict right now because plantings have just taken place this spring. We do see a strong expansion,” Abbassian said. Likewise, the US Department of Agriculture’s “Supply/Demand” March report forecasts world wheat crop to reach 668 million tons for 2011-2012, up 21 million tons on the yearearlier.
As supply increases, the stockpile in the MENA region could damper demand, namely in Egypt and Saudi Arabia. “That could take away some of the spring and summer purchases and correct prices,” said Abbassian.
Meanwhile, some experts in the foodstuffs industry exporting to Gulf Cooperation Council countries expect lower demand through the rest of the spring, as a wait-and-see mood prevails among consumers and government buyers.
Preemptive government subsidies in the MENA may also hold down prices consumers pay on the shelf. As an example, the United Arab Emirates recently agreed with the Union Cooperative Society supermarket chain to reduce prices, mainly on rice and bread, back to their 2004 figures starting this April and running until year’s end.
“Higher prices now pressure macroeconomics rather than consumers who are poor and still receiving subsidies. OPEC [Organization of Petroleum Exporting Countries] can afford to help consumers,” Abbassian said. But Neaime has his doubts about less wealthy Middle Eastern countries following the trend. “Countries like Lebanon and Egypt don’t have enough fiscal space to deal with price shocks and subsidies. They have their debts and deficits to worry about,” he said.
Growing pains
But, natural disasters and political turmoil are pieces of a much bigger mosaic. The world’s population is growing at an alarming rate, and resources are getting scarcer. “It’ll take a lot to feed nine billion people in the future,” said Neaime. The IMF asserted that record food prices would persist in line with economic growth and rising living standards.
The pain will be felt especially by the poor, particularly in Africa’s most impoverished countries. According to Neaime, despite economic progress in the developing world, the benefits have not been distributed throughout.
“Economies are growing and so is GDP [gross domestic product] but nothing is happening on a social level,” said Neaime. This means severe repercussions for those who can’t afford food at the current price levels, let alone at future ones. “If you are poor, then that 50 or 60 percent of your income will suddenly not be enough,” added Abbassian.
The repercussions of rising food rises are that they tend to foster greater general social inequity and instability, given that the poor are less able to afford their daily bread while the wealthy cash in on rising food prices through investing in commodities. This often leads to further price hikes and the perpetuation of a cycle that becomes more unpleasant and unsustainable the longer it persists; in the absence of a global calamity to stunt future growth prospects in emerging economies, food price increases seem all but foretold.
So, while the unrest sweeping the MENA region came unexpectedly to many, the unrest down the road, both here and beyond, should not.
