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Decision and Policy Analysis Research Area – DAPA

World food prices enter dangerous territory

Global food prices are reaching unprecedented levels signalling fears about food security and the possibility of political instability. The FAO food price index is a measure of the monthly change in international prices of a basket of food commodities (cereals, oilseeds, meat and sugar) and last month hit an all time high of 231 points, above the previous record set in June 2008 during the food crisis. The price index is up 3.4% from December and in the second half of 2010 it leapt by 32% alone, another indication of increasing volatility.  “These high prices are likely to persist in the months to come. High food prices are of major concern especially for low-income food deficit countries that may face problems in financing food imports,” said FAO economist Abdolreza Abbassian.

Many have attributed the need for democratic revolution as a key driver of the recent popular uprisings in Tunisia and Egypt. Undoubtedly, this has played a role but some commentators are arguing that food price inflation in both countries is equally culpable for widespread public dissent. Worried about what has been going on, neighbouring countries have taken urgent measures to ensure the price of bread does not bring about their collapse. For example, Algeria purchased approximately 1 million tonnes of wheat in January alone to ensure domestic food stocks are well supplied. Jordan, Turkey, Libya, Qatar, Morocco and Lebanon are following suit. Food hoarding is likely to continue and food exporting countries are expected to endorse protectionist measures.

Prices have risen consistently for the past 7 months.

At the recent World Economic Forum  in Davos, world leaders have warned that food prices will lead to greater social unrest and trade wars between nations. Indonesian President Susilo Bambang Yudhoyono, said that with population rising, increasing pressure on food, energy and resources could lead to economic war. Meanwhile, President Nicolas Sarkozy of France called for greater regulation of commodity markets to prevent speculation and price volatility. However, business leaders at the conference rejected calls for controls on commodity speculation. Some argued that apart from speculation, governments buying food to secure supplies was equally responsible for soaring prices.

The prices are not only affecting the developing world but also the pockets of consumers in richer countries. Nonetheless, the poorest in the Global South are affected much more as they spend a higher proportion of their household income on food. In this sense, increased food prices has a regressive impact on families.

In reference to Africa, the World Bank believes that despite rising food costs, increased investment in agriculture since 2008 has left it in a better position to cope with price volatility. According to the WB’s African vice president, Obiageli Ezekwesili: ‘’the 2008 unrest led to a rediscovery of the importance of agriculture and food security. Those that have made the reorientation have seen much more progress. A significant number of African countries are now able to have agricultural productivity growth of 3 percent per annum. It was below 1 percent before.’’

It is a simple matter of political economy that countries are buying food supplies to ensure their populations do not starve and to prevent riots. If business leaders blame governments for pushing prices up further due to hoarding, then we must question why they countries are doing this in the first place. Commodity speculation is largely responsible and with increasing concerns about climate change affecting food production, rising prices are likely to continue.

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