The first wave of the food crisis occurred from 2007 through 2008 when the price of rice tripled and wheat and meat doubled. The crisis caused political, social and economical instability in both poor and developed nations, with riots in over 20 countries.
The causes included severe weather, unusually low global stockpiles, use of crops for conversion to fuel, and financial speculation. The Global Financial Crisis and accompanying recession dampened demand for commodities and prices fell, temporarily.
In 2011 the second wave of the food crisis hit, with wheat production severely affected by a drought in Russia and China, and a flood in Australia. In February 2011, the FAO Food Price Index, which measures monthly price changes for a food basket of cereals, oilseeds, dairy, meat and sugar, hit a record high 238. The food crisis in 2011 triggered widespread hunger, food riots and civil unrest and is thought to be the spark of the Arab Spring.
The third wave is brewing in the United States, which is in the midst of its worst drought in 56 years and wreaking havoc on the world’s largest producer of corn, soybeans and wheat. The United States produces more than 12 billion bushels of corn a year, approximately 41 per cent of total global production. Corn yield in the US was around 148 bushels per acre in 2011 the lowest average yield since 2005.
As a result of the prolonged drought, the US department of agriculture said corn output would only reach 10.8 billion bushels, a drop in production of 17 per cent. The price of a bushel of corn has soared since the middle of June when it was hovering around US$5 per bushel. On August 10 the price hit $8.49; it is now presently trading around $8.40, a 65 per cent jump in two months, and a year on year increase of almost 30 per cent.
More than one-third of the US corn crop is used to feed livestock, 13 per cent is exported, much of it to feed livestock abroad, and about 14 per cent goes toward food and beverage production. Given surging energy prices during the past decade, more than 35 per cent of the crop is now used for ethanol production, the government requiring 13.2 billion gallons (49.96 billion litres) of corn ethanol to be blended with gasoline.
The US represents 37 per cent of world production of soybean, with 91 million metric tonnes produced. The US government is expecting soybean crop yields to be down by 12 per cent this year. The price of soybean has climbed 38 per cent since June 1 and is up 27 per cent year-on-year.
It is not only corn and soybean prices that are rapidly rising. Wheat also gained about 40 per cent in the past two months. Although the FAO Food Price Index is below the all-time high, it was up six per cent in July and is presently sitting at 213. Weather predictions remain grim. The first seven months of 2012 were the warmest on record in the United States, with July breaking the all-time high previously set in the Dust Bowl of 1930. The weather issues are not isolated to just the US, Russian and Ukrainian wheat crops are also affected by low rainfall and Europe is experiencing too much rain.
There is a high probability that exports may be either banned or limited by producing countries to ensure adequate supplies for their own populations and if history repeats itself, binge buying to protect national reserves. This will contribute to an already unstable and volatile market.
Next year may very well record the highest food prices on record and consequentially global economic, political and social turmoil and devastation could ensue.
Anthony Galliano, Chief Executive Officer, Cambodian Investment Management, email [email protected]