Global Food Shortages

[Wraith]

Global food chain stretched to the limit

Soaring prices spark fears of social unrest in developing world

By John W. Schoen Senior producer
msnbc.com

Strained by rising demand and battered by bad weather, the global food supply chain is stretched to the limit, sending prices soaring and sparking concerns about a repeat of food riots last seen three years ago.

Signs of the strain can be found from Australia to Argentina, Canada to Russia.

On Friday, Tunisia's president fled the country after trying to quell deadly riots in the North African country by slashing prices on food staples.

"We are entering a danger territory," Abdolreza Abbassian, chief economist at the U.N.'s Food and Agriculture Organization (FAO), said last week.

The U.N.'s fear is that the latest run-up in food prices could spark a repeat of the deadly food riots that broke out in 2008 in Haiti, Kenya and Somalia. That price spike was relatively short-lived. But Abbassian said the latest surge in food stuffs may be more sustained.

"Situations have changed. The supply/demand structures have changed,” Abbassian told the Australian Broadcasting Corp. last week. "Certainly the kind of weather developments we have seen makes us worry a little bit more that it may last much, much longer. Are we prepared for it? Really this is the question."

Price for grains and other farm products began rising last fall after poor harvests in Canada, Russia and Ukraine tightened global supplies. More recently, hot, dry weather in South America has cut production in Argentina, a major soybean exporter. This month's flooding in Australia wiped out much of that country's wheat crop.

As supplies tighten, prices surge. Earlier this month, the FAO said its food price index jumped 32 percent in the second half of 2010, soaring past the previous record set in 2008.

Prices rose again this week after the U.S. Department of Agriculture cut back its already-tight estimate of grain inventories. Estimated reserves of corn were cut to about half the level in storage at the start of the 2010 harvest; soybean reserves are at the lowest levels in three decades, the USDA estimates, in part because of heavy buying by China. The ratio of stocks to demand is expected to fall later this year to "levels unseen since the mid-1970s," the agency said.

"I haven't seen numbers this low that I can remember in the last 20 or 30 years," said Dennis Conley, an agricultural economist at the University of Nebraska. "We are at record low stocks. So if there any kind of glitch at all in the U.S. weather, supplies are going to remain tighter and we might see even higher prices."

Higher oil prices are also pushing up the cost of food — in two ways. First, the added shipping cost raises the delivered price of agricultural products. Higher oil prices also divert more crops like corn and soybeans to biofuel production, further tightening supplies for livestock feed and human consumption. Conley estimates that more than a third of the corn produced in the U.S is now used to make ethanol.

Despite tightening supplies, the rise in food prices has been much tamer in the developed world. On Friday, the U.S. Bureau of Labor Statistics reported that food prices at the consumer level rose just one-tenth of one percent. On Thursday, the governmnet reported that the food component of the Producer Price Index rose just 0.8 percent in December. For all of 2010, food prices at the producer level rose 3.5 percent.

The reason for the modest price rise in the U.S.? People living in developed countries eat more processed foods, so raw materials make up a much smaller portion of the total retail cost.

"In this country, a much higher proportion of your food dollar is spent on processing, advertising and promotion and marketing," said Tom Jackson, a senior economist with Global Insight.

"There’s not really that margin built in between the farmer and the consumer in the developing countries."

Food price spikes hit less-developed countries much harder because a greater share of per capita income — half or more — goes to pay for food. U.S. consumers, on the other hand, spend an average of about 13 percent of disposable income on food.

The impact of higher prices is blunted somewhat in countries that subsidize food to stabilize costs, but the trend in prices may make those subsidies unsustainable. Last month, Iran deployed squads of riot police to maintain order after slashing subsidies for food and gasoline. In September, 13 people were killed in street fighting in Mozambique after the government cut subsidies it could no longer afford, sparking a 30 percent rise in bread prices.

Though strong global demand and tight supplies are bringing misery to some poor countries, the price surge is a sign of improving conditions in emerging economies. That’s because increased demand is caused in part to rapidly rising standards of living, according to David Malpass, president of economic research firm Encima Global.

"Some of the gains in prices in Brazil and India are because people are better off," he said "So we have to expect some inflation in those countries as people earn more and more per year."

Source

Not much impact here in the west yet, but sounds like things are looking pretty grim in less developed parts of the world. Also sounds like just a bit more bad weather could push things over the edge.

I'm interested here in the effect of food subsidies on this stuff (I'm assuming they're talking about subsidies at the consumer level, rather than the production level that we've often talked about). The article mentions that the subsidies have blunted the impact of this current problem for those countries, and I'm honestly having problems (beyond the obvious financial risks) finding fault with such policies. It increases demand in more normal times a bit more than it would otherwise be, but that just encourages production to presumably increase as well. Are there any other distortionary effects on the market? Is distortionary even a word? It doesn't look like one.

[Loki]

A) Those subsidies are expensive. The government has to get money from somewhere to pay for them. That means higher taxes, which isn't good when you're competing with dozens of other poor countries for the same foreign capital.

B) People get used to the subsidies. It becomes incredibly difficult (politically) to remove them. This is true even when the need for those subsidies is gone.

C) The subsidies are frequently paired with export restrictions. You could probably figure out why not allowing the export of goods can be bad.

D) It leads to an oversupply of food, which means a disproportionately high number of people working in agriculture (instead of other sectors). This probably isn't a problem in the poor countries with high unemployment though.

The article didn't mention a benefit of high food prices. It leads to the kind of social unrest that removes dictators (as we just saw in Tunisia). Bad economic performance is the best indicator of when a dictator gets overthrown.

[Dreadnaught]

True, but in terms of dollar amounts is it worth it? Like energy security, food security is one of those bedrock "big issues" that are foundational to our economies and societies.

While I agree with you in principle that food subsidies are not efficient, they do serve a purpose of creating abundances that may not otherwise exist. Those abundances may be wasteful or misallocated, but they still help avoid the quite-possible "perfect storms" of bad news that are also possible in any industry.

[Loki]

I forgot to mention the strong incentive to smuggle the products abroad.

[agamemnus]

Despite tightening supplies, the rise in food prices has been much tamer in the developed world. On Friday, the U.S. Bureau of Labor Statistics reported that food prices at the consumer level rose just one-tenth of one percent. On Thursday, the governmnet reported that the food component of the Producer Price Index rose just 0.8 percent in December. For all of 2010, food prices at the producer level rose 3.5 percent.

If he's so senior, why can't he use spell check?

Following that logic, I don't believe his spelling... or his numbers!

D) It leads to an oversupply of food, which means a disproportionately high number of people working in agriculture (instead of other sectors). This probably isn't a problem in the poor countries with high unemployment though.

It also gives the US food security and political leverage over developing countries...

[Wraith]

While I agree with you in principle that food subsidies are not efficient, they do serve a purpose of creating abundances that may not otherwise exist. Those abundances may be wasteful or misallocated, but they still help avoid the quite-possible "perfect storms" of bad news that are also possible in any industry.

This is kinda what I was thinking. Knee-jerk capitalism says subsidies are bad, but in this case the inefficiencies don't seem so awful, and it does make it harder for people to starve to death. I'm not really buying the political momentum argument (Loki's B) as a reason not to do it, that just means you have to be sure. C isn't really about the the problem. Complaining that it stabilizes the political environment is a kinda odd reason to oppose the policy.

[Loki]

This is kinda what I was thinking. Knee-jerk capitalism says subsidies are bad, but in this case the inefficiencies don't seem so awful, and it does make it harder for people to starve to death. I'm not really buying the political momentum argument (Loki's B) as a reason not to do it, that just means you have to be sure. C isn't really about the the problem. Complaining that it stabilizes the political environment is a kinda odd reason to oppose the policy.

What happens when circumstances change? Iran is spending a ridiculous amount of money on fuel subsidies. They were implemented when far fewer people had cars and when oil cost far less. Now it gets riots every time it tries to reduce those subsidies. Some African countries are going deep into the red because they're spending more and more on food subsidies as the global price of food goes up. You seem to forget that the kind of countries that face hunger are generally not the ones who have a strong economy. These subsidies make it very difficult for the governments to pay back their debtors, to attract FDI, or to spend on projects of long-term importance (i.e. infrastructure).

[Dreadnaught]

The thing is that, objectively speaking, we know that food is different and we know that the US government isn't bankrupting itself on food subsidies compared to, say, Medicaid transfer payments.

The issue is recognizing that food is different. Yes, I agree that food subsidies can hurt developing countries. But those countries may also have higher potential threats to their food supply that could impact other countries that are otherwise far away.

[Nessus]

US government isn't bankrupting itself on food subsidies

Arguably those subsidies are a large part of why your citizens are so desperately in need of health care, but I don't care enough to find citations.

[Illusions]

Arguably those subsidies are a large part of why your citizens are so desperately in need of health care, but I don't care enough to find citations.

Subsidies for corn and taxes on the import of cane and beet sugar are why its cheaper for companies to produce and use high fructose corn syrup in place of regular sugar in nearly all products that use it.

[agamemnus]

Subsidies for corn and taxes on the import of cane and beet sugar are why it's cheaper for companies to produce and use high fructose corn syrup in place of regular sugar in nearly all products that use it.

I swim in it, daily. Good for teh moneybags.

[GGT]

Not much impact here in the west yet, but sounds like things are looking pretty grim in less developed parts of the world. Also sounds like just a bit more bad weather could push things over the edge.

I'm interested here in the effect of food subsidies on this stuff (I'm assuming they're talking about subsidies at the consumer level, rather than the production level that we've often talked about). [...]

The US has over 40 million people on food subsidies ("food stamps"). Applications for assistance went thru the roof during The Great Recession and high unemployment. How can that not be considered an impact?

It's worse for developing nations, where people use 20-30% of their income on food. When someone scrapes by on $5/day, and rice (or a grain) + cooking oil costs them $1, that's a huge problem. The kind of thing starts riots.

[GGT]

The thing is that, objectively speaking, we know that food is different and we know that the US government isn't bankrupting itself on food subsidies compared to, say, Medicaid transfer payments.

The issue is recognizing that food is different. Yes, I agree that food subsidies can hurt developing countries. But those countries may also have higher potential threats to their food supply that could impact other countries that are otherwise far away.

Food is Political and Global now. (Are you talking about producer subsidies, not consumer ones?)

Food is different. Are you still comfortable with speculators distorting commodity prices?

[Dreadnaught]

They help stabilize commodity prices.

[GGT]

They help stabilize commodity prices.

I don't mean farmers hedging for their own products. I mean speculators, hedge funds, and high frequency traders (who don't even take possession of the commodity) that add to price distortion.

[Dreadnaught]

Once again, they're never pushing prices beyond what people are willing to pay. Otherwise they lose. They don't exist in a vacuum after all.

[GGT]

Once again, they're never pushing prices beyond what people are willing to pay. Otherwise they lose. They don't exist in a vacuum after all.

You're trying to have it both ways, aren't you? Food is different, and it does matter.

When it comes to shortages and people literally starving in developing economies, you acknowledge social unrest or rioting. Then subsidies are a necessary thing.

Turn that around for developed countries that provide the food, and you don't like subsidies for farmers.

Sure, it's not a vacuum. But it's also not the freeee market you imagine it to be, where supply and demand simply follow some "natural" course of equilibrium.

[Dreadnaught]

I was talking about the logical/ethical dilemma around food subsidies. Futures contracts are not part of that dilemma.

[GGT]

I was talking about the logical/ethical dilemma around food subsidies. Futures contracts are not part of that dilemma.

Not all future commodity bets, hedges or trades are the same. You know that. And producer or trade subsidies aren't the same as consumer subsidies. You know that, too.

I'd like to think we could all agree one one thing....that when the price of basic food is too high for poor people or poor nations, massive food insecurity and/or starvation is something to be avoided. Not just because it could lead to political or social unrest, but because human beings deserve to be fed.

[Dreadnaught]

We weren't talking about consumer subsidies.

[GGT]

The OP said

"I'm interested here in the effect of food subsidies on this stuff (I'm assuming they're talking about subsidies at the consumer level, rather than the production level that we've often talked about)."

[GGT]

Not about subsidies per se, but makes me wonder if/when US farm subsidies will get nixed. A 29% jump in cheese....

Food Prices Causing Riots in Africa Stoke Record U.S. Farm Economy Growth

By Alan Bjerga and Tony Dreibus - Jan 18, 2011


The same record food prices causing riots in Algeria and export bans in India are allowing President Barack Obama to combine the biggest-ever U.S. farm exports with the tamest inflation since the 1960s.

Global food costs jumped 25 percent last year to an all- time high in December, according to the United Nations. Countries probably spent at least $1 trillion on imports, with the poorest paying as much as 20 percent more than in 2009, the UN says. In the U.S., the largest exporter, retail food rose 1.5 percent last year and will gain as little as 2 percent in 2011, the Department of Agriculture estimates.

Governments from Beijing to Belgrade are boosting imports, limiting sales or releasing stockpiles to curb food inflation. Higher prices will push U.S. agricultural exports up 16 percent to a record $126.5 billion this year, according to a USDA forecast. While U.S. consumers haven’t been squeezed so far, grocers from Winn-Dixie Stores Inc. to SuperValu Inc. have said they plan increases. Commodities will keep rising, according to a Bloomberg survey of more than 100 analysts and traders.

“We are absolutely spoiled,” said Jason Britt, president of Central States Commodities Inc., a research and analysis company in Kansas City, Missouri. “We have the luxury that we spend a small percentage on food. But I wouldn’t be surprised to see larger bites of our incomes used.”

Raw-Material Costs

About 19 cents of every dollar spent on food covers raw- material costs in the U.S., so retailers can limit increases by cutting spending on labor or marketing, said Ephraim Leibtag, a food economist at the USDA in Washington. The consumer price index rose 4.2 percent since the end of 2007, the smallest three-year increase since 1965, Labor Department data show.

Producer spending for processed foods rose 4.9 percent in the U.S. last year, while consumer prices increased 1.5 percent, Labor Department data show. A record 43.2 million Americans received food stamps in October. The jobless rate is running at 9.4 percent, and Federal Reserve Chairman Ben S. Bernanke said Jan. 7 the labor market may take five years to recover.

Corn advanced 52 percent last year in Chicago, wheat jumped 47 percent and soybeans gained 34 percent. Cattle futures touched a record on Jan. 13 in Chicago, a day after coffee reached a 13-year high in New York. Rice futures jumped as much as 3.6 percent in Chicago today.

Wheat may rise as much as another 16 percent this year, with sugar, corn, soybeans, coffee and cocoa also gaining, according to the Bloomberg survey of analysts, traders and investors in December.

Farm Income

The farm boom is aiding Obama’s goal of doubling U.S. exports in five years, with this year’s shipments accounting for 4 percent of the $3.14 trillion needed to meet the target.

U.S. farm income last year probably exceeded the 2004 record of $87.3 billion, and cropland values gained as much as 10 percent, according to Neil Harl, an agricultural economist at Iowa State University and former adviser to the governments of Ukraine and the Czech Republic.

Moline, Illinois-based Deere & Co., the world’s largest farm-equipment maker, will report record profit of $5.47 a share this year, according to the mean of 11 analyst estimates compiled by Bloomberg. Earnings for Plymouth, Minnesota-based Mosaic Co., North America’s second-largest fertilizer producer, will more than double to $4.57 a share in the year ending in May, the mean of seven estimates shows.

Cover Costs

Northfield, Illinois-based Kraft Foods Inc., the world’s second-biggest food company, raised prices of Maxwell House and Yuban coffee in the U.S. three times last year. General Mills Inc., the Minneapolis-based maker of Cheerios and Lucky Charms, said in November it would increase some cereal prices.

Products for supermarkets rose 1.8 percent in the three months ended Sept. 22, while consumer prices gained 1.6 percent, Winn-Dixie Chief Executive Officer Peter Lynch said on a Nov. 2 conference call. Some will probably keep increasing to cover costs, and the Jacksonville, Florida-based company has a “relatively good” chance of passing that to consumers, he said.

Starbucks Corp., the world’s largest coffee-shop operator, said in September it would raise some prices after the jump in coffee and milk costs. Domino’s Pizza Inc., the biggest U.S. pizza-delivery chain, said in October it would charge customers more after a 29 percent jump in cheese.

Steaks, ‘Baconator’

Morton’s Restaurant Group Inc., a Chicago-based steakhouse chain, is considering its third increase in the past year, Chief Financial Officer Ronald DiNella said at a conference in Dana Point, California, on Jan. 12. Wendy’s/Arby’s Group Inc., the maker of the 1,360-calorie Baconator Triple burger, said in November it was raising prices in some stores.

SuperValu, the owner of Save-A-Lot and Cub Foods stores, expects most of its rises to be in the “lower single-digit range,” with “double-digit increases” for some commodity items, Chief Executive Officer Craig Herkert said on a conference call Jan. 11.

Some increases may not stick as companies compete for market share. “Low price is the focus in food,” said Bill Simon, president and chief executive of U.S. stores at Wal-Mart Stores Inc., the world’s largest retailer.

While the deflation of last year will shift in 2011 to a “slightly inflationary environment” in food, Bentonville, Arkansas-based Wal-Mart expects to provide as much as 20 percent savings per shopping trip compared with competitors, Simon said on a conference call Oct. 13. “We’re not going to get beat.”

Wholesale Prices Rising

Wholesale costs in the U.S. rose 1.1 percent in December from November, the most in 11 months, led by rising commodities including fuel and food, the Labor Department reported Jan. 13. Food rose 0.8 percent in December from a month earlier, spurred by the biggest gain in soft drinks since January 2007 and the largest surge in fruit in three years. Energy jumped 3.7 percent.

“At the margin, the consumer will swap down from rib eye steak to butt steak and then to chicken, but in reality very little shall happen,” said Dennis Gartman, a Suffolk, Virginia- based economist and author of the Gartman Letter LC. “Of far greater concern to the consumer is rising gasoline.”

The Standard & Poor’s GSCI Agriculture Index of eight futures climbed 52 percent in the last 12 months, led by cotton, corn and wheat, as flooding in Canada, China and Australia and drought in Russia and Europe ruined crops. The UN food index, which tracks wholesale costs of 55 foods, now exceeds levels seen in 2008, when violence erupted from Haiti to Egypt.

Algeria, Tunisia

Unrest is starting again. Three people were killed and 420 injured in protests over milk and flour costs in Algeria this month. Tunisian President Zine El Abidine Ben Ali tried to end a month of protests by promising lower prices for bread, milk and sugar, before handing over power to his prime minister on Jan. 14 and leaving the country.

The Serbian government said Jan. 10 it will consider an export duty on wheat to discourage shipments. South Korea said the following day it plans to increase the supply of some food products to help damp prices.

India, home to 1.2 billion people, halted onion exports in December after prices more than doubled in a year. Opposition parties have said they plan nationwide protests. China sold commodities including sugar and corn from strategic reserves last year to contain inflation that reached 5.1 percent in November, the most in 28 months.

No such problems are emerging in the U.S. for now. Consumer prices will rise 1.5 percent this year, compared with 1.6 percent in 2010, according to the median of as many as 61 economists’ estimates compiled by Bloomberg. While the USDA is forecasting gains in retail food prices of 2 percent to 3 percent in 2011, even at the top of that range the gains would still be below the average over the last decade.

“We are a food-abundant country and the last place where food inflation is going to rise,” said Erick Erickson, an economist at the Washington-based U.S. Grains Council, which promotes crop exports. “We have such a rich and robust food- supply situation compared to other countries.”

http://www.bloomberg.com/news/2011-0...ort-gains.html

[Dreadnaught]

Part of this difficulty going forward will be differentiating the components these price increases. Some part of it is due to less supply, but another significant part is due to US monetary policy.

Our global monetary system revolves around the dollar and our economy goes through capital cycles that are massive compared to other places. By reducing interest rates to zero and printing dollars, it floods foreign markets with dollars [seeking more return] and increases inflation.

This is a key bone of contention the Chinese have with us, and the rest of the world is starting to feel it too.

[GGT]

Well, as long as Chinese demand for oil products keeps climbing, we'll all have to swallow higher prices for gas and transportation. That's the one inflationary thing that can drive everything off the tracks, for everyone.

[Aimless]

Okay so lemme see if I've gotten this straight... this year, the EU will NOT dump food into the ocean?

[agamemnus]

But where will the fish get their calories?

[Dreadnaught]

Okay so lemme see if I've gotten this straight... this year, the EU will NOT dump food into the ocean?

Does that really happen? That takes the whole idea of "food dumping" to a very literal level.

[agamemnus]

Does that really happen? That takes the whole idea of "food dumping" to a very literal level.

Literal. Litteral. Littoral.

[Aimless]

Does that really happen? That takes the whole idea of "food dumping" to a very literal level.

I honestly don't know, perhaps when it comes to fish, dunno bout cereals

[rumrunner]

gee, I almost feel bad that I live in a rural area. Farms and ranches abound, I get most of my fruits, veggies, and meat direct from the source. Cheaper and fresher than most others. I almost feel guilty going to the "Olathe Sweet, sweet corn Festival" every year, where for $20 I get all the farm-fresh corn on the cob I can eat in a day plus a live concert. Almost. If I was more of a country music fan, my guilt would be overwhelming.