Jul 19, 2011

Crikey clarifier: why are global food prices so volatile?

Every news story about the African crisis references the impact of world food prices. Why are they so volatile and how should they be stabilised?

Amber Jamieson — Freelance journalist in New York

Amber Jamieson

Freelance journalist in New York

Across the Horn of Africa, an unprecedented humanitarian crisis is unfolding. One aid official from UNICEF describes it as "almost a perfect storm" for creating a devastating famine situation. Years of civil unrest and corrupt governance, combined with the worst drought in 60 years and rising global food prices, have left 10 million hungry people needing emergency attention. Every news story about the African crisis -- which sees 1000 Somalian refugees arrive daily into Kenya and millions suffering malnutrition in Somalia and Ethiopia -- references the impact of world food prices. High grocery prices are constantly cited as one of the motivators for the Middle Eastern uprisings earlier this year. Global food prices of corn, coffee, meat and dairy are all on the rise. Sugar prices have just jumped up, pushing the latest UN food price index to 234 -- 39% higher than June 2010. But why are global food prices so volatile? Should they be stabilised, and how is that done? Crikey took it to the experts ... Why are global food prices so high? Blame weather conditions and governments. "Price movements are associated with seasonal conditions and then with some governments imposing export restrictions and that will naturally impact price movements on world markets," Dr Jammie Penm, the chief commodity analyst at ABARES, told Crikey. Penm explains the spike in prices in the last 12-18 months started in the Black Sea region, where drought affected crops like wheat in Russia and Ukraine caused its governments to impose export restrictions in order to hoard limited crops for their own citizens. That sent wheat prices soaring, as well as prices for crops like barley, oats and grains. At the same time, Canada and countries across the European Union saw poor yield due to inclement weather, pushing costs even higher. Other inputs like transportation also have a severe impact, says Penm. How can prices be stabilised? Ultimately it all comes down to supply and demand, said Penm: "Higher prices lead to increased production later on, that's just economics." Paul Barnett from the sustainable agriculture flagship at CSIRO told Crikey the "problem we have around what are the causes is that there are no silver bullets or one particular cause that you can identify in any particular year". "Year to year," he said, "the emphasis on what to attribute the rise in global prices [to] will change." But Barnett explains government policies, as discussed at a recent meeting of agricultural G20 ministers, can provide good options for food security, like trade liberalisaton, smarter food management and better delivery of aid. The CSIRO is currently involved in a program with the Australian government, which has invested $100 million into research and development for agricultural practises in Africa to help improve food security by making crops more resilient, encouraging livestock agriculture over broadacre farming (as it's more hardy in times of drought) and examining soil and fertiliser. What about keeping food reserves to help in the leaner times? Groups like Oxfam support an increase in "bumper stocks" -- food reserves which can help countries with food insecurity get through the leaner crop years. Penm disagrees with the concept, saying that historically -- like Australia’s attempts to buffer wool stocks in the 1980s and 1990s -- it hasn't worked, and it can be "very costly and create a distortion", noting the high cost of storage facilities to house bumper stock. There are pros and cons to bumper stocks, said Barnett: "I would say there's an opportunity for stocks to have a calming influence on price volatility. There's also an opportunity to distort the market." Does speculation on the commodities market have a negative impact on global food prices? Penm, an economist, says markets are rational and any negative influence will only be short term: "On one hand, you could have companies who are traders influencing market prices ... [but] it's very difficult to prove, there's no tangible evidence. On the other hand we don't believe market speculation can influence price movements on longer term bases; if that's the case we will throw all the economic textbooks out the window." Barnett agreed, but added: "When you get speculation, there are studies that tell both sides of the story. Generally, there can be harmful speculation." Speculation on overseas commodities markets helps Australian farmers though. Said Peter Carberry, also from the sustainable agriculture flagship at the CSIRO: "If you're an Australian farmer producing for an export market, an increase in prices is advantageous. That's grown by low food stocks and demand via commodities. The downside on the rural poor in developing countries." But why does global food prices affect the Horn of Africa, an area that is mainly reliant on subsistence farming? "With food prices, there's not a great correlation [between global food prices and local subsistence farming] where's there 's famine, because that food is not going to enter the global trade," said Carberry. "The reason why it's exacerbated is that food has to be put in there through the World Food Program, or people in urban areas there have to buy food, and that's more expensive." Penm agreed, saying the issue isn't food supply as much as food affordability: "A number of low-income countries cannot afford to buy the food they want. The nutritional value of their daily intake is very poor because they don't have money, often because of political situations or wars. But it's not that we are running out of food ... it's that poor countries suffering instability don't have the money to purchase the food."

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2 thoughts on “Crikey clarifier: why are global food prices so volatile?

  1. JLG

    “Penm, an economist, says markets are rational”

    God bless the academic economist….

  2. Flower

    CSIRO could negotiate a cheap deal with African countries over the GM canola crops grown last year by 300 farmers. The harvest is languishing in WA because nobody wants it.

    Or African trade delegates could liaise directly with Monsanto at WA’s ‘publicly owned’ grains research body Intergrain?

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