Who’s Hungry? Outrageous Food Prices Screw Everyone Except…

10 June 2011. Since the second half of last year, global wheat prices have more than doubled according to the World Bank, and prices of corn, sugar and oil have skyrocketed. The Cereal Price Index soared a shocking 69 percent from May 2010 to May 2011. On average, the Food Price Index averaged 232 points in May 2011, 37 points higher than May 2010.

10 June 2011. Since the second half of last year, global wheat prices have more than doubled according to the World Bank, and prices of corn, sugar and oil have skyrocketed. The Cereal Price Index soared a shocking 69 percent from May 2010 to May 2011. On average, the Food Price Index averaged 232 points in May 2011, 37 points higher than May 2010.

Abdolreza Abbassian, economist at UN Food and Agriculture Organization speaking to Planet Money explains the reasons for soaring food prices:

[quote]1. The rise of biofuels, like ethanol made from corn. This market, driven largely by government subsidies, has created demand that is what economists call “price inelastic” — demand stays strong even as prices rise.

2. More demand from the developing world, particularly for meat. Livestock eat grain, so increasing demand for meat means increasing demand for grain. This source of demand has also been price inelastic.

3. Disappearing stockpiles. Because of WTO rules, the U.S. and Europe have been moving away from subsidies that led to vast reserves of wheat and corn.

Subsidies still exist in the U.S. and Europe, but they’ve taken a different form. Governments used to buy and stockpile surplus food from farmers. Now it’s more common for governments to give farmers subsidy payments without actually buying any of the food they produce.

Big stockpiles mean that the supply of food remains relatively constant, even when there are disasters like the vast fires that destroyed last summer’s Russian wheat crop. But in the absence of stockpiles, unexpected shocks like those fires in Russia last summer have a huge impact on supply. That, in turn, contributes to huge price spikes.

“What you get is a world market that is increasingly tight, without much of a buffer,” Abbassian told me. “Without a buffer, you have volatility. It’s as simple as that.”

4. Speculation. The volatility created by declining stocks is in turn compounded by speculation — traders betting on the rise or fall of prices.

Abbassian argued that bringing more transparency to commodities futures markets might mitigate this issue.
“If we know who is buying it and what are they buying it for, that may get those who are just there to gamble to be more cautious about their positions,” he said.[/quote] [break]

So who’s going hungry?

The world’s poorest spend up to 80 percent of their income on food compared to 10 percent in the US. So it’s the poorest who are suffering – spending up to the equivalent of $10 for a kilo of rice and breaking out into violent protests as a result of food shortages and exorbitant prices.

In Africa, food prices are higher now than at any time since 1984. Even though the World Bank’s Food Price Watch sees Sub-Saharan Africa less exposed to risks related to soaring food prices as domestic food production is increasingly replacing imports and recent harvests have been good, the price spikes have deepened existing macro and micro vulnerabilities. On the macro level, countries with a high share of food imports and limited fiscal space like Burundi are driven deeper into current-account deficits and the possibility of social unrest as they become unable to use subsidies and price controls to shield their populations from inflation.

On the micro level, higher prices make life even more difficult for Africa’s poorest, who already spend between 60 to 80 per cent of their income on food. Faced with reduced access to food and increased vulnerability to the seasonality of local food prices and markets, households are forced into unavoidable compromises, such as choosing cheaper (often less nutritious) food, selling productive assets, withdrawing children from school, forgoing healthcare, or simply eating less than they need. (allAfrica)

In China, food production has also been affected by negative climate change and caused food prices to soar. And it’s driving consumers to spend less on other goods, such as new cars for example.

Prices of pork and vegetables rose as central and eastern China were hit by a drought that lasted two months, UnionPay said. Data from the Ministry of Agriculture showed the agricultural products wholesale index rose to 186.3 at the end of May from 180.1 at the start of the month.

Supersize me

In the US however, while rising food prices is becoming a big issue impacting consumers, the reality is food prices in the US are driven by labour costs and other factors rather than the price of the ingredients.

Plus, Americans only spend about 10 percent of their income on food and consume less staples such as a wheat, corn and sugar. And while these commodities have doubled in price, food prices at the grocery store in the US have only gone up by 1.5 percent.

So the US seems to be far away from the epicentre of world hunger, though then place where the food crisis was actually created to rake in profits on Wall Street.

Read more: Your Daily Bread is Goldman Sachs’ Hottest Commodity

Liz Zuliani

EconomyWatch