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The
globe’s worst food crisis in a generation emerged as a
blip on the big boards and computer screens of America’s
great grain exchanges. At first, it seemed like little
more than a bout of bad weather. In Chicago, Minneapolis
and Kansas City, traders watched from the pits early last
summer as wheat prices spiked amid mediocre harvests in
the United States and Europe and signs of prolonged
drought in Australia. But within a few weeks, the traders
discerned an ominous snowball effect—one that would
eventually bring down a prime minister in Haiti, make more
children in Mauritania go to bed hungry, even cause
American executives at Sam’s Club to restrict sales of
large bags of rice.
As prices
rose, major grain producers including Argentina and
Ukraine, battling inflation caused in part by soaring oil
bills, were moving to bar exports on a range of crops to
control costs at home. It meant less supply on world
markets even as global demand entered a fundamentally new
phase. Already, corn prices had been climbing for months
on the back of booming government-subsidized ethanol
programs. Soybeans were facing pressure from surging
demand in China. But as supplies in the pipelines of
global trade shrank, prices for corn, soybeans, wheat,
oats, rice and other grains began shooting through the
roof.
At the
same time, food was becoming the new gold. Investors
fleeing Wall Street’s mortgage-related strife plowed
hundreds of millions of dollars into grain futures,
driving prices up even more. By Christmas, a global panic
was building. With fewer places to turn, and tempted by
the weaker dollar, nations staged a run on the American
wheat harvest.
THE GLOBAL GRAIN TRADE: THE
HAVES AND HAVE-NOTS
Foreign
buyers, who typically seek to purchase one or two months’
supply of wheat at a time, suddenly began to stockpile.
They put in orders on US grain exchanges two to three
times larger than normal as food riots began to erupt
worldwide. This led major domestic
US
mills to jump into the fray with their own massive orders,
fearing that there would soon be no wheat left at any
price.
“Japan,
the Philippines, [South] Korea, Taiwan—they all came in
with huge orders, and no matter how high prices go, they
keep on buying,” said Jeff Voge, chairman of the Kansas
City Board of Trade and also an independent trader. Grains
have surged so high, he said, that some traders are
walking off the floor for weeks at a time, unable to
handle the stress.
“We have
never seen anything like this before,” Voge said. “Prices
are going up more in one day than they have during entire
years in the past. But no matter the price, there always
seems to be a buyer....This isn’t just any commodity. It
is food, and people need to eat.”
The
food-price shock now roiling world markets is
destabilizing governments, igniting street riots and
threatening to send a new wave of hunger rippling through
the world’s poorest nations. It is outpacing even the
Soviet grain emergency of 1972-75, when world food prices
rose 78 percent. By comparison, from the beginning of 2005
to early 2008, prices leaped 80 percent, according to the
United Nations’ Food and Agriculture Organization. Much of
the increase is being absorbed by middlemen—distributors,
processors, even governments—but consumers worldwide are
still feeling the pinch.
The
convergence of events has thrown world food supply and
demand out of whack and snowballed into civil turmoil.
After hungry mobs and violent riots beset Port-au-Prince,
Haitian Prime Minister Jacques-Edouard Alexis was forced
to step down earlier this month. At least 14 countries
have been racked by food-related violence. In Malaysia
Prime Minister Abdullah Ahmad Badawi is struggling for
political survival after a March rebuke from voters
furious over food prices. In Bangladesh more than 20,000
factory workers protesting food prices rampaged through
the streets two weeks ago, injuring at least 50 people.
To quell
unrest, countries including Indonesia are digging deep to
boost food subsidies. The UN World Food Program has warned
of an alarming surge in hunger in areas as far-flung as
North Korea and West Africa. The crisis, it fears, will
plunge more than 100 million of the world’s poorest people
deeper into poverty, forced to spend more and more of
their income on skyrocketing food bills.
“This
crisis could result in a cascade of others…and become a
multidimensional problem affecting economic growth, social
progress and even political security around the world,” UN
Secretary-General Ban Ki Moon said.
Prices for
some crops—such as wheat—have already begun to descend off
their highs. As farmers rush to plant more wheat now that
profit prospects have climbed, analysts predict that
prices may come down as much as 30 percent in the coming
months. But that would still leave a year-over-year price
hike of 45 percent. Few believe prices will go back to
where they were in early 2006, suggesting that the world
must cope with a new reality of more expensive food.
REASONS FOR RISING FOOD
PRICES
People
worldwide are coping in different ways. For the 1 billion
living on less than a dollar a day, it is a matter of
survival. In a mud hut on the Sahara’s edge, Manthita Sou,
a 43-year-old widow in the Mauritanian desert village of
Maghleg, is confronting wheat prices that are up 67
percent on local markets in the past year. Her solution:
stop eating bread. Instead, she has downgraded to cheaper
foods, such as sorghum. But sorghum has jumped 20 percent
in the past 12 months. Living on the 50 cents a day she
earns weaving textiles to support a family of three, her
answer has been to cut out breakfast, drink tea for lunch
and ration a small serving of soupy sorghum meal for
family dinners. “I don’t know how long we can survive like
this,” she said.
Countries
that have driven food demand in recent years are now
grappling with the cost of their own success—rising
prices. Although China has tried to calm its people by
announcing reserve grain holdings of 30 percent to 40
percent of annual production, a number that had been a
state secret, anxiety is still running high. In the
southern
province
of Guangdong, there are reports of grain hoarding, and in
Hong Kong, consumers have stripped store shelves of bags of rice.
Liu Yinhua,
a retired factory worker who lives in the port city of
Ningbo on China’s east coast, said her family of three
still eats the same things, including pork ribs, fish and
vegetables. But they are eating less of it.
“Almost
everything is more expensive now, even normal green
vegetables,” said Liu, 53. “The level of our quality of
life is definitely reduced.”
In India
the government recently scrapped all import duties on
cooking oils and banned exports of nonbasmati rice. As in
many parts of the developing world, the impact in India is
being felt the most among the urban poor who have fled
rural life to live in teeming slums. At a dusty and nearly
empty market in one
New Delhi
neighborhood, shopkeeper Manjeet Singh, 52, said people at
the market have started hoarding because of fear that
stocks of rice and oil will run out.
“If one
doesn’t have enough to fill one’s own stomach, then what’s
the use of an economic boom in exports?” he said, looking
sluggish in the scorching afternoon sun. He said his
customers were asking for cheaper goods, like groundnut
oil instead of soybean oil.
Even
wealthy nations are being forced to adjust to a new
normal. In Japan, a country with a distinct cultural
aversion to cheaper, genetically modified grains,
manufacturers are risking public backlash by importing
them for use in processed foods for the first time.
Inflation in the 15-country zone that uses the euro as its
currency—which includes France, Germany, Spain and
Italy—hit 3.6 percent in March, the highest rate since the
currency was adopted almost a decade ago and well above
the European Central Bank’s target of 2 percent. Food and
oil prices were mostly to blame.
In the
United States experts say consumers are scaling down on
quality, and scaling up on quantity if it means a better
unit price. In the meat aisles of major grocery stores,
said Phil Lempert, a supermarket analyst, steaks are
giving way to chopped beef and people used to buying fresh
blueberries are moving to frozen. Some are even trying to
grow their own vegetables.
“A bigger
pinch than ever before,” said Pat Carroll, a retiree in
Washington, D.C. “I don’t ever remember paying $3 for a
loaf of bread.”
The root
cause of price surges varies from crop to crop. But the
crisis is being driven in part by an unprecedented linkage
of the food chain.
A big
reason for higher wheat prices, for instance, is the
multiyear drought in Australia, something that scientists
say may become persistent because of global warming. But
wheat prices are also rising because
US
farmers have been planting less of it, or moving wheat to
less fertile ground. That is partly because they are
planting more corn to capitalize on the biofuel frenzy.
This year
at least a fifth and perhaps a quarter of the US corn crop
will be fed to ethanol plants. As food and fuel fuse, it
has presented a boon to American farmers after years of
stable prices. But it has also helped spark the broader
food-price shock.
“If you
didn’t have ethanol, you would not have the prices we have
today,” said Bruce Babcock, a professor of economics and
the director of the Center for Agricultural and Rural
Development at Iowa State University. “It doesn’t mean
it’s the sole driver. Prices would be higher than we saw
earlier in this decade because world grain supplies are
tighter now than earlier in the decade. But we’ve
introduced a new demand into the market.”
In fact,
many economists now say food prices should have climbed
much higher much earlier.
After the
fall of the Berlin Wall, the world seemed to shrink with
rapidly opening markets, surging trade and improved
communication and transportation technology. Given new
market efficiencies and the wide availability of
relatively cheap food, the once-common practice of
hoarding grains to protect against the kind of shortfall
the world is seeing now seemed more archaic. Global grain
reserves plunged.
Yet there
was one big problem. The global food trade never became
the kind of well-honed machine that has made the price of
manufactured goods such as personal computers and
flat-screen TVs increasingly similar worldwide. With food,
significant subsidies and other barriers meant to protect
farmers—particularly in Europe, the United States and
Japan—have distorted the real price of food globally,
economists say, preventing the market from going through
normal price adjustments as global demand has climbed.
If market
forces had played a larger role in food trade, some now
argue, the world would have had more time to adjust to
more gradually rising prices.
“The
international food trade didn’t undergo the same kind of
liberalization as other trade,” said Richard Feltes,
senior vice president of MF Global, a futures brokerage.
“We can see now that the world has largely failed in its
attempt to create an integrated food market.”
In recent
years there has been a great push to liberalize food
markets worldwide—part of what is known as the “Doha
round” of world trade talks—but resistance has come from
both the developed and developing worlds. Perhaps more
than any other sector, nations have a visceral desire to
protect their farmers, and thusly, their food supply. The
current food crisis is causing advocates on both sides to
dig in.
Consider,
for instance, the French.
The
European Union doles out about $41 billion a year in
agriculture subsidies, with France getting the biggest
share, about $8.2 billion. The 27-nation bloc also has set
a target for biofuels to supply 10 percent of
transportation fuel needs by 2020 to combat global
warming.
The
French, whose farmers over the years have become addicted
to generous government handouts, argue that agriculture
subsidies must be continued and even increased in order to
encourage more food production, especially with looming
shortages.
Last week
French Agriculture Minister Michel Barnier warned EU
officials against “too much trust in the free market.”
“We must
not leave the vital issue of feeding people,” he said, “to
the mercy of market laws and international speculation.”
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