Record high food prices stoke fears for economy

SINGAPORE/LONDON Thu Jan 6, 2011 3:33pm EST

A farmer throws fertilizer on a rice paddy field in Dong Xung village, outside Hanoi, April 19, 2010. REUTERS/Kham

A farmer throws fertilizer on a rice paddy field in Dong Xung village, outside Hanoi, April 19, 2010.

Credit: Reuters/Kham

SINGAPORE/LONDON (Reuters) - Record high food prices are moving to the top of policymaker agendas, driven by fears it could stoke inflation, protectionism and unrest and dent consumer demand in key emerging economies.

The United Nations' food agency (FAO) said on Wednesday that food prices hit a record high last month, above 2008 levels when riots broke out in countries as far afield as Egypt, Cameroon and Haiti.

In Asia, official data and analyst estimates both pointed to inflationary pressures. Chilli prices have increased fivefold in Thailand in the last year and Indonesia's president called for households to plant food in their own gardens.

President Susilo Yudhoyono Bambang told a cabinet meeting people should be "creative" in planting, with Trade Minister Mari Pangestu leading the way in planting at home.

"I have 200 chilli plants in flowerpots," Pangestu told a briefing on Thursday. "The agriculture ministry is informing farmers how to take care of the plant and also encouraging consumers to plant chilli in their own yards."

Surging food prices have often provoked unrest in urban areas of poor countries, where food makes up a high proportion of household purchases.

Analysts say African and Caribbean economies dependent on food exports could be particularly hard hit, helping stoke unrest and potentially pushing governments toward imposing export bans and expropriating foreign-owned farmland.

If Asian and other emerging consumers have to spend more of their income on food, other purchases will fall -- and that could be bad news for a global economy that has placed much of its hopes for recovery on consumption in developing economies.

World Bank President Robert Zoellick urged governments in a newspaper opinion column to avoid protectionist measures as food prices rose and called upon the Group of 20 leading economies to take steps to make sure the poor get adequate food supplies.

French President Nicolas Sarkozy has asked the World Bank to conduct urgent research on the impact of food prices ahead of G20 meetings later this year, a source familiar with the matter said.

INDIAN INTEREST RATE PRESSURE

Food price protests were seen a factor in the ousting of Indonesia's long-term autocrat Suharto in 1998, and anger over a farmland purchased by South Korean firm Daewoo at a time of rising prices was in part blamed for a 2009 coup in Madagascar.

India's food price inflation rose to a one-year high of more than 18 percent in the year to the end of December, data on Thursday showed. That, along with rising fuel prices, is the main reason analysts expect the central bank to raise rates this month.

The Indian government has used a range of measures for years to ensure stable food prices, but since last year has boosted the release of national stocks of grains and has pledged to continue duty-free imports of crude vegetable oils.

In China, several cities have implemented direct controls to limit food price increases and the central government has vowed to eliminate speculation in the country's commodities markets.

The cost of food rose 11.7 percent in the year to November, while non-food items were up just 1.9 percent. But, reflecting concerns that inflation is creeping beyond food to the wider economy, consumer goods prices and housing costs showed clear jumps.

Fu Bingtao, an economist with the Agricultural Bank of China in Beijing, said in a report the price of grains, the country's most important food, would rise in 2011 by 10 percent, adding to an 11.7 percent rise in 2010.

"Speculative trading and hoarding of specific agricultural products may continue," he said.

The FAO said sugar and meat were at their highest since its records began in 1990. Prices were at their highest since 2008 crisis levels for wheat, rice, corn and other cereals.

Benchmark prices solely in Asia for rice suggested a different picture.

The region's staple food now stands at $535 per tone -- less than half its 2008 levels of more than $1,000 a tone that prompted several governments at the time to impose curbs on exports to protect their domestic markets.

ASIAN POLICY DILEMMA

But most experts expect upwards price pressure to continue, particularly if countries slap on export bans and further squeeze supply, and short-term investors again buy into agricultural commodities as they did in 2008.

Last year, wheat futures prices rose 47 percent, buoyed by a series of weather events including drought in Russia and its Black Sea neighbors. U.S. corn rose more than 50 percent and U.S. soybeans jumped 34 percent.

Alongside bad weather in Australia, Europe, North America and Argentina, rising Asian demand is at the heart of the spike. China, for example, is expected to buy 60 percent of globally traded soybeans in 2011/12, double its purchase of four years ago.

Dry, hot weather has hit soy and corn crops in Argentina, a leading exporter, fueling a rally in U.S. grains futures in recent weeks on supply fears. After an uneasy start, climate conditions have improved in neighboring Brazil, the world's No. 2 soy provider.

Higher interest rates do little to ease pressure on food prices. Demand is inelastic because people have to eat, but current price pressures are largely supply-led, so tighter monetary policy would not directly help.

The danger, however, is that food inflation spreads to the wider economy.

"I think there's an urgent need to be more pre-emptive in tightening monetary policy to prevent some of these inflation pressures from erupting," Neumann said. Some central banks had taken some action but more needed to be done.

South Korea, like other Asian countries that run trade and current account surpluses, could give more room to its currency to rise to offset rising import costs on food.

But higher interest rates or the likelihood of a rising currency would just encourage a flood of portfolio capital from investors spurning sluggish growth in developed economies. And rising currency could hurt exports, the major pillar of many economies.

(Reporting by Reuters bureaux; Writing by Neil Fullick; Editing by Vicki Allen)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (5)
Popham wrote:
Well, if you take two minutes to read this article, then you’ll be
made more aware of worldwide food shortages and higher food prices.
We have already seen the signs in our local supermarkets.
Water shortages all over the world are another issue to consider.
Are you paying attention, my fellow Americans?
Are you paying attention?
Good luck, America.

Jan 06, 2011 10:19am EST  --  Report as abuse
Too many people, too many speculators, too much environment degradation resulting in rapid climate change, too little food — all equaling high food prices and severe social unrest, no matter how much science tries to solve the problem.
Hmmm. Sound very much like the warnings issued by population researchers in the 1970s.
And it is all stampeding towards a critical mass from which there is no return until a global pandemic or some sort of sudden and shocking disaster culls our human numbers, unfortunately and probably including me and my family, to what they were at the end of the 15th Century.
This is not a doomsday scenario, but a very natural course of birth, death and rebirth pattern.

Jan 06, 2011 12:42pm EST  --  Report as abuse
NwadNwad wrote:
Popham – Good Luck America!!!! It’s mostly the US’s fault that the world is in this mess, so why should America have all the good luck?

People here need to demand accountablility across the board and all the way to the very top – then the people of this country might deserve some good luck because the right thing has been done.

On a different note – people around the world need to stop having soooooo many children. There is not enough food, water etc., and we humans are destroying this earth. If you have more than two children (apart from adopting or foster care, etc), then you should be taxed to the hilt.

Jan 06, 2011 1:27pm EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.