Oil, Food and Riots

By Amy Trendle, March 4, 2011

Bread seller in Cairo - photo by frohrn

Bread seller in Cairo - photo by frohrn

A combination of skyrocketing food prices and an oil price being sent ever higher by social upheaval in North Africa is worrying many. In the last twelve months the price of corn has increased by 83%, wheat by 75% and coffee by 85%. Climate change, richer diets, droughts and floods are all contributing to an unstable scenario.

Food prices are on the rise. The UN’s Food and Agriculture Organization has just announced that its food price index was up 2.2 % in February 2011. This was the eighth consecutive month that food prices have risen. In the last twelve months the price of corn has increased by 83%, wheat by 75% and coffee by 85%.

The price rises are the result of a variety of factors, the rising demand for food in emerging markets such as India and China, poor harvests in 2010 in Russia, China and Argentina, stockpiling by governments attempting to stave off political unrest and disastrous flooding last year in Australia, Canada, Pakistan and China.

This situation, coupled with rising oil prices which affects the transportation of food by ship and road and which makes the oil needed to run agricultural machinery more expensive could well lead to even further price rises in 2011.

Bread, oil and regime change
There is a political element to all this too. The World Bank estimates that higher food prices have driven 44 million people into poverty in developing nations since last June.

There have been suggestions that the price of grain (and tight supply) was a contributing factor to the toppling of the governments in Tunisia and Egypt. With a grim symbolism it was a young street-food vendor, Mohamed Bouazizi, 26, who was fed up with paying bribes to the local police that started it all off. He set himself on fire in protest and the knock on effect is still with us.

The price of oil is back up at $US120 and is exacerbating the situation. It has become costlier to transport cereals by ship and road and as an aside the piracy issue has pushed up insurance rates too.

The social unrest in Libya has caused a spike in the oil price. It has pulled nearly one million barrels a day that were sold to EU countries off the market. The Saudis are trying to steady the price of oil by raising output but to little effect. There are still fears that the royal family of Saudi Arabia itself may be the target of an ousting.

The last food price crisis is hardly in the distant past, in 2007/2008 but we are not quite at those levels as the stocks of grain are still being dipped into but this cannot go on forever, eventually the buffer stocks will run out. For developing countries even a small hike in the price of fundamental foodstuffs such as bread can lead to rioting and in developed countries higher retail food prices could hinder the precarious economic recovery that has been so long in the making.

Climate and dietary changes
Climate change may well be the cause of erratic weather patterns which is causing unpredictable harvests which in turn leads to severe price volatility in cereals and essential commodities. The message from climate change experts is that the erratic weather patterns will continue as will the volatility in food prices. Droughts and flooding may become much more common. As well, the emerging economies of India and China are also seeing their population change their eating habits. Meat consumption is on the rise as are the quantities of wheat and rice being consumed. They are eating more and better. China is now a massive importer of US soya. The game has changed.

Falling back into poverty
“Global food prices are rising to dangerous levels and threaten tens of millions of poor people around the world,” said World Bank President Robert Zoellick. About 44 million people in emerging markets have fallen into poverty because of rising food prices, according to the World Bank.

The World Bank’s Global Food Price Index also paints a grim picture, it rose 15% from October 2010 to the end of January 2011. In China, food prices have jumped by 10.3% in the last year. China also became the top importer of U.S. agricultural goods in 2010 for the first time.

The future hardly looks stable, there is set to be a reduction in the amount of arable land available globally, populations are growing, water is becoming in short supply for agricultural use. In the near term (the next two months) , the key will be the upcoming harvests in the southern hemisphere. If they too are weak then prices will skyrocket or if abundant it may tame the price rises. Either way, the market is very tight and this price volatility will be with us for the foreseeable future.

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