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Wheat, food and fears
As the Russian landscape burns and Eurasia’s agricultural zone sizzles in a record heat wave, the agricultural commodities markets are threatening to spawn a food crisis akin to the one in 2008.
Mixed signals regarding the size of the global wheat supply and the
likely impact of Russian Premier Vladimir Putin’s August 4 decision to
halt all exports of the grain from Russia for the rest of 2010 are
leading to concerns that price inflation in the wheat market could usher
another food crisis. The shortage in 2008 left hundreds of millions of
people worldwide unable to afford basic foodstuffs, aggravating the
overall impact of the later global financial crisis upon poor countries.
A key lesson of 2008 is that volatile global financial markets can
result in food commodity price speculation that has dire consequences
for the world’s poorest. The inflationary trend that slammed poor
countries in early 2008 began with a slow but steady rise in commodity
trading prices in early 2007. By the summer of 2007, the overall volume
of trading on the U.S. food commodities markets had skyrocketed to
record levels, signaling that large investors recognized weaknesses in
the stock and real estate markets and were seeking safer havens. The
result was a phenomenal escalation, not only in the volume of food
commodity investment, but also in trading prices.
The extraordinary commodity inflation led to rice hoarding in Asia, with
key producer nations refusing export to poorer, rice-needy neighbor
states. By March 2008, even the middle class residents of Manila were
rioting in the streets for rice and basic foodstuffs.
The commodity markets eventually settled down, in large part because the
overall financial crisis of 2008 overtook the impact of specific
agricultural pricings. But the costs of basic foods never did return to
pre-2007 levels, and poor countries remain hard hit well into 2010.
By May 2008, the World Bank was estimating that 100 million people had
been pushed into subsistence poverty due to food inflation in the first
quarter of that year. The bank signaled in the final quarter of 2008
that another two hundred to three hundred million people were pushed
backwards into dire poverty by the world financial crisis.
So what will this latest round of wheat and grains inflation mean?
Climate Heats, Russia Burns, Wheat Disappears
By the time Putin banned all Russian wheat, corn, barley, rye, and flour
exports, the country had been experiencing the worst heat wave in
recorded history. From Kazakhstan to the north of Siberia, a desperate
drought has gripped the region for months, causing the most severe water
shortages in 130 years. And wildfires have burned vast tracts of
forests and agricultural zones for the last two weeks. The U.S. National
Oceanic and Atmospheric Administration reported that satellite imagery
revealed that 948 forest fires, covering 26,000 hectares, were burning
across Russia at the end of July.
According to Putin’s August 4 speech, one-fifth of Russia’s wheat crop
has been destroyed, and more than a third of the country’s arable land
has been rendered useless, either by fire or drought. Other major wheat
producers in the region, including Ukraine, report similar scales of
drought-induced losses. Putin says Russia’s wheat export ban will remain
in effect until at least the end of 2010.
There are many wheat-producing nations, including the United States, and
no inherent reason why even a 100 percent devastation of Russia’s crop
need result in a global grains shortage. But Canada is also experiencing
drought-induced shortages this year, and epidemics of wheat rust and
the fungal disease dwarf bunt have damaged crops across much of northern
Europe.
Though the UN Food and Agriculture Organization (FAO) and U.S.
agricultural officials have tried to calm market fears, repeatedly
stating that wheat harvests in Latin America and the United States will
be strong in 2010, commodity trading in wheat and other grains has,
ominously, followed the 2007-2008 trend.
Trade in wheat futures has soared, pushing prices to their highest level
since early 2008. Overall, prices have risen 90 percent in roughly five
weeks time.
In June, before this latest round of inflation commenced, the FAO and
OECD jointly issued a grim forecast of food prices for the coming
decade. Thanks to a combination of scarcities, energy costs, and rising
middle class demand for diverse diets, the report forecast steady global
increases in cereal, grain, oil, and dairy prices for the next decade,
with the net impact being an up to 40 percent increase over 2007 levels.
Several wealthier, import-dependent countries such as Saudi Arabia and
China have been buying up arable land in poorer African and Asian
nations, as a hedge against future food shortages.
The prescient FAO/OECD report warned in June that “if history is any
guide, further episodes of strong price fluctuations cannot be ruled
out, nor can future short-lived crises.”
Bad Time to Be Poor
The overwrought phrase “food security” connotes literally obtaining
sufficient calories and nutrients to stay alive. At this moment–before
the impact of rising grain prices is felt–millions of people are
already experiencing a food security crisis in Chad, Sudan, Niger, and
Mauritania, according to NGOs Save the Children and M?decins Sans
Frontiers. Some five million people in the region face starvation.
Egyptian authorities said last week that the country has six months of
reserve grain supplies: If prices remain high, or rise further, the most
populous nation in the Middle East faces dire food shortages.
USAID is trying to move quickly to close food security gaps in Rwanda,
Democratic Republic of the Congo, Kenya, Malawi, Sudan, and Uganda,
providing support for agricultural production in those countries. But
the effort is a race against the food inflation clock, as crops planted
today may not reach markets in time to offset the impact of inflated
imports.
Last week, the cost of a loaf of bread in Johannesburg jumped 20 percent in just a few days.
“This is the fastest wheat price rally we have seen since 1972-73,” Gary
Sharkey, head of wheat procurement at UK-based Premier Foods, which
makes the popular Hovis brand of bread, told the Financial Times. “The
industry will be unable to ignore a 50 percent rise in wheat prices.”
Across the wealthy world, food production companies are locking down
futures of flour and wheat, hedging against possible shortages or
further inflation. This is, in turn, locking commodity prices at
new-high levels. Piantedosi Baking Company of Boston, pizza giants Papa
John’s and Domino’s, and a large range of processed foods makers have
already locked in.
Can a Crisis Be Averted–This Time?
The day after Putin put the kibosh on Russian grain exports, U.S. wheat
producers flooded the futures markets with rosy forecasts that brought
trading prices down somewhat. Jacques Diouf, director-general of the
FAO, has been holding round-the-clock press briefings in an effort to
calm the markets. Even with the Russian catastrophe, Diouf says, global
grain production in 2010 is about 100 million tons above the 2007-2008
nadir. If no further weather or disease perils strike major crops in the
world, he says, there should be plentiful wheat, corn, rice, rye, and
soy harvests this year.
But markets are often irrational. It is widely expected that Ukraine and
Kazakhstan will follow Russia’s lead, banning export of their meager
grain harvests. This could spark another round of price speculation. It
is widely rumored that India, Switzerland, France, and other European
nations have begun hoarding a variety of basic grains, in anticipation
of further inflation. If true, that could further drive up market
prices. Investment analysts are all over the place in their current
forecasts, predicting everything from a 180 degree turnaround in food
prices before the end of the year, to absolute doom.
Source: Council on Foreign Relations
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