Global population growth and a shift from grain-based diets are contributing to a sharp rise in the cost of food, which has already sparked riots in several African countries. Richard Wachman looks at the threats to developed and developing countries and the hurdles in the path of increased productivity
March 2, 2008
Scratch beneath the surface of major social or political upheaval - the French or Russian revolutions, Germany's military collapse in 1918 or more recently China's Tiananmen Square - and you will find that food shortages, brought about by crop failure, naval blockade or spiralling prices, lie at the heart of the matter.
No wonder, then, that recent steep rises in the cost of basic foodstuffs including wheat, barley, maize, rice, cotton and soya are sending shockwaves around a developed world used to bargain-basement prices at supermarkets. Anecdotal evidence in Britain suggests that people living in deprived areas are reining in expenditure to cut food bills that have been edging higher since 2004.
In less developed countries, the situation is more serious: dearer food has sparked riots in former French west Africa, Yemen and Zimbabwe. In Burkina Faso, one of Africa's poorest countries, troops were called out to quell widespread public disorder. Disturbances have also been reported in Mauritania and Senegal.
Richard Warburton, head of agribusiness at Bidwells, a specialist research consultancy, says: 'We are experiencing a surging market across a range of commodities. During the first half of this decade, the Goldman Sachs commodity index soared by 77 per cent, compared with a fall of 19 per cent in the FTSE 100 index of leading shares.
'But the interesting bit is that in 2007, soft [agricultural] commodities moved into prime position ahead of their hard counterparts [oil, gold and metals].'
The upshot of rising food prices is already being felt acutely in China. Robert Ziegler, of the Philippines-based International Rice Research Institute, gives a warning that 'civil unrest' is possible as people in China are eating more rice than is being produced, and that the cost of rice has doubled to $400 a tonne in five years. 'We are at a pre-crisis stage,' Ziegler says. 'The way things are coming together isn't pretty.'
Last year, Russia introduced retail price controls on some basic foods to prevent sky-high shopping costs denting the Putin administration's popularity, and last week the UN said food prices had risen 75 per cent since 2000 and that budgetary constraints could force it to ration food aid to developing countries.
Today, for the first time in history, the number of people living in cities is equal to the number living in the countryside, illustrating the rapid industrialisation of nations such as Brazil, India and China. The price of food is heading north for a variety of reasons, but taken together, they represent 'a perfect storm', say analysts. Prices are expected to continue to surge for the next two or three years, perhaps longer.
First, food price inflation is being fuelled by surging demand from the middle classes of Asia and South America as people move from basic grain to protein-based diets, meaning higher consumption of meat, milk, fruit and vegetables, but with rice still a popular staple for both the affluent and urban and agricultural poor. As more people turn to a meat-based diet, additional grain is needed to feed bigger herds of cattle, further fuelling demand.
Second, the global population continues to rise: from 1.6 billion in 1900 to 6.5 billion today, according to the UN's food and agriculture organisation (FAO), which forecasts that the figure will peak at 9 billion by the end of the century. Population growth imposes extra strain on arable land, already being eroded by the extreme weather caused by global warming. Over the past two years, Australia, one of the biggest grain producers, has been hit by severe drought.
Against this unpromising backdrop, vast areas that could be used to grow food are being turned over to the production of ethanol and biodiesel, derived from corn, sugar, soya and palm oil, as the developed world, notably the US and EU, seeks to reduce its dependence on oil.
An FAO report says: 'Biofuels tend to allocate resources [for example, land, labour and capital] away from the production of food crops into the production of feedstocks for biofuels.'
Although food prices aren't expected to come down soon, Abdolreda Abbassion, a commodities analyst at the FAO, says it is important to keep things in perspective. He says that in real, inflation-adjusted terms, the price of wheat is no higher than in the mid-1970s and that other foodstuffs are trading at levels that were commonplace during the Asian economic crisis in the mid-1990s.
Abbassion thinks 'it is too early to say' whether food prices will continue to climb, although he does not believe that they will come down to levels enjoyed in the 1970s and 1980s.
Subsidies also play a part. Farmers in developing countries have been priced out of the market by the developed world, thanks to agricultural subsidies that have cushioned their Western counterparts for the last quarter of a century.
Rising prices have allowed the EU and US to cut these subsidies, but not deeply enough for African farmers. They have long complained that rich nations have unfairly boosted production and driven down prices to the detriment of more competitive producers in poorer countries.
So could the upward trajectory of food prices provide an opportunity for African farmers? The problem is not knowing where prices will be in 10 years' time. In developing countries, investment in agriculture has declined and poorer countries have become increasingly dependent on imports to meet their domestic food requirements. But dare they invest heavily now, only to find in a few years that the bubble bursts?
Abbassion is optimistic. He says: 'If today's high prices trickle down to the farm level in developing countries, they could have a very positive impact on food production and convert agriculture into an engine of growth and employment.'
Warburton is not sure. He admits to concern about 'the level of unknowns surrounding the ability of world agriculture to adapt and resolve these [food production] issues'. And he questions how much extra land can sustainably be brought back into production and where the irrigation water will come from. 'This perhaps implies a blind faith in technological solutions,' he adds.
By contrast, Abbassion says that since the fall of the Soviet Union, 24 million hectares of land in former communist lands have become idle and that if a proportion could be used to farm food crops, global supply and demand would become more closely aligned.
Sebastian Barrack, director of commodities research at Australia's Macquarie Bank, says food price inflation could fall or plateau in two or three years as suppliers boost productivity and, perhaps, invest in alternatives such as GM crops. He adds: 'Assuming normal climatic conditions [perhaps a big assumption], markets could build up stocks and return to surplus, but it will take time.'
Barrack adds that in the face of constrained arable land availability, 'farmers will need to encourage greater productivity. [But] limited arable land means production increases of one crop will be at the cost of another.'
Even the idea of a food crisis is music to the ears of investors and speculators who have made billions off the back of the natural resources boom in base metals, oil and gas. Now there are fresh opportunities for investment in farmland, farm technology and infrastructure.
Warburton mentions North Bridge Capital Partners AgroInvest Romania fund: Romanian land prices are attractive relative to the rest of Europe and demand is rising. Investors are also piling into specialist commodities funds run by mainstream banks such as Barclays, Deutsche and Investec.
And yet, establishing future trends is difficult, with an array of competing views. The UN says there is 12 per cent more arable land available that is not forested. Others say farm production can be increased only by destroying forests, raising the spectre of an environmental catastrophe.
Global food security is fast becoming one of the most important issues of the 21st century and, while there is disagreement about how to tackle the problem, few believe that it will diminish in importance in the foreseeable future.