Wednesday, November 28, 2007

What, me worry: Why are world food prices so high?

A couple weeks ago, I questioned how certain expanding African economies could be stepping up their export industry while maintaining sizable trade deficits. It seems that this recent food issue has shed a little light on the problem.

This food issue – because I refuse to call it a crisis – has cropped up in the past few weeks because of what a spokeswoman at the UN Food and Agriculture Organization termed the “perfect storm” of bad weather, tight food supplies and strong demand has lead to a 21 percent increase in the world’s food bill. Developing countries may end up paying even more.

The press has made much out of the worried reactions of consumers around the world. Food riots took place in Mauritania and the once-pacific Senegal; the Russian government freezes prices; Italians boycotted pasta, Argentineans turned their backs on tomatoes because they became more expensive than meat.

But are things really that bad? FAO claims that price volatility has always been distinctive characteristic of the world agriculture market. The Economist claims Russian President Vladimir Putin froze prices for political gain. The Mauritian government claims the food riots there were orchestrated.

Flat bread for a flat world?
Granted, these arguments don’t lend too much optimism. The defining factor of this year’s overcharged food market is that consumers have seen simultaneous price increases in nearly every commodity.

The big price gainers include the world’s most important staples:

  • Wheat: Poor seasons due to bad weather in Europe, Pakistan, Morocco and Australia created a 50 to 65 percent increase compared to last year’s price. However, high prices may bring down demand, thus depressing prices;
  • Rice: Even after reaching its highest price in 20 years in October, rice is still rising slower than other commodities. Experts predict this year’s large harvest will bring prices down;
  • Maize: After an initial run due to an interest in biofuels, corn products hit a ten-year high in February before falling. Massive plantings have been reported around the world, making experts confident still-high prices will continue to fall;
  • Sugar: After two years of processing setbacks, white gold posted 25-year highs last year, but has since drastically fallen.

Some may point out that simple supply and demand is at work here. Demand is up because food production has increased at 1.3 percent a year, below the 1.35 percent escalation to the world’s population.

FAO researchers point out that globalization is a culprit in these high prices. Where West African floods and Australian droughts used to be considered local events, food markets are now more tightly intertwined. With a limited amount of breathing space between production and consumption, consumers can literally feel these local shocks rippling through the world markets.

But globalization is only an effect. It’s not the cause of across-the-board high prices. For this, the Rome-based FAO has found many.

  • High petroleum prices: Yes, oil remains an easy journalistic scapegoat to explain away a complicated issue, but petroleum does affect food prices in many subtle ways. Often an important ingredient in fertilizers, expensive petroleum drives up the price of crop inputs. It’s well known that near record oil prices have increased interest in biofuels and other natural energy sources, which divert agriculture crops reserved for feeding livestock, pushing up prices for cattle (and meat). Increased interest in biofuels will also raise the demand for other feed stocks like sugar, maize, rapeseed and soybean.
  • Increased freight rates: Like higher petroleum prices, this is not a cut-and-dry issue. Yes, oil prices affect the cost of shipping goods, but not as much as you think. Increased value for petroleum has increased the demand for iron ore and coal. These products are transported in the same type of ships as foodstuffs. Ship makers introduced fewer new ships onto the market than expected this year, so competition for these boats became fierce. In some cases, foodstuffs stayed in port, lessening supplies and further increasing prices. Finally, as merchandise prices rise, shipping costs increase due to higher insurance rates. All these factors combined to drive up shipping freight rates 57 percent between June and October.

One overlooked feature of globalization is ocean shipping costs remain roughly the same rate as they were in the early 1970s. African nations, however, still pay higher shipping charges than the rest of the world. That’s because they don’t do a lot of trading with other nations, so pulling a ship off popular routes to stop in port in Lomé or Dakar or Tema is expensive. Also, West African countries have heavy trade imbalances. What this means in practical terms is that when containers are unloaded at African ports, not many exports are loaded back on. Half-full boats don’t help shipping firms, who must charge higher shipping costs.

  • Weak dollar: FAO points out that currency issues affect all markets, but they have rarely wreaked so much havoc as the dollar has this year in agriculture markets. The U.S. dollar’s gradual decline against other currencies has boosted demand for American exports. High demand eventually turns into higher prices, which we have seen in the wheat market. It’s a real-life version of Whac a Mole: If the price of one commodity increases, more farmers will rush to plant that product, driving up the prices for the commodities farmers ignore.
  • Border decisions: Most West African governments collect a great amount of revenue through import taxes. In a decision to help local rice growers, the government of Senegal decided to institute a 20 percent surtax on imported rice, which increases the cost of a sack of rice in the local markets. At the beginning of next year, all ECOWAS countries will harmonize rice duties at five percent for paddy rice and 10 percent for milled or broken rice. This does not help consumers in the short term, however.

Drilling for food
If we take another step deeper into West African food supplies, it is best to examine the imports of Senegal and Mauritania, two counties which have already faced riots against high prices.

Like many African states, Senegal is a net food importer. The interesting fact is this country, where millet was once a dietary staple, now ranks rice as its primary import. In fact, the country imported more than 536,000 metric tons of milled patty rice in 2000, roughly twice as much as the second most popular product, Wheat. By 2004, the last year statistics are available, broken rice became the number one import (oddly, it wasn’t on the top 20 before) with 799,863 metric tons. Wheat stays number two with 313,777 metric tons.

Let’s return to the above discussion regarding the country’s surtax on imported rice: It was a classic solution to protect a fledgling domestic industry. However, domestic rice can’t be grown fast enough to satisfy Senegal’s population, and the FAO admits the industry most likely won’t survive without the protection.

There’s something else at play here: purchasing power. Most Senegalese won’t buy products they feel are socially beneath them. If you can afford fish in your rice, you don’t procure pounded dried fish that’s used to feed the poor. The same goes for rice. Those who can find the money for Thai rice don’t purchase local rice. (That’s a truth in Burkina Faso, also.) There’s a large caveat with this argument: For one, it’s a pretty large generalization, but one that I’ve heard elsewhere.

Since I am at it, I’ll paint another generality. More people eat rice because they are busier. What I mean is more of their time is spent working or being economically occupied. This may be a good thing, for working women have less time to sit around and cook millet, which often takes longer to prepare than rice. (Generalizations aplenty today!) Urbanization may also play a part in falling millet stocks. Families might feel the need to put down some of the village traditions in lieu of becoming more modern, urbanized. There’s also the fact that perhaps millet – or the right millet, because it varies by region – may not be found in all urban markets throughout the city.

Moving on from broad strokes, let’s look at Mauritania, a country where I’ve been able to collect far less information. In 2000, the country’s number one import was raw sugar, when these hard-core tea drinkers brought in 112,327 metric tons. Tea must have something to do with it, because refined sugar ranked fourth: 93,458 metric tons. Wheat also played a big role in the market with 72,991 metric tons.

2004 is when things get a little weird. Wheat still remains high with 148,509 metric tons. Refined sugar still takes home number two with 189,840 metric tons. But, there’s no raw sugar to be found. Instead, the number one import goes to….Cigarettes: $66,325,000 worth of puffy treats. (I knew I liked this country.)

I can’t tell you where raw sugar went; nor can I tell you were Joe Camel came from. (Cigarettes may always have been immensely popular, but perhaps the cigarette importers knew a way to, um, “sidestep” import duties.) Going back to the food imports, I will say they may be skewed because the country receives quite a bit of food aid from the World Food Program. In fact, between 2003 and 2006, Mauritania averaged more than 33,000 tons of donated food, compared to roughly 11,000 tons for Senegal. How this affects a country’s grocery list, I don’t know.

Nor do I really know about what these lists say about these two countries. These countries happen to import a lot of food – and a lot of food that now happens to be expensive. But you could say that about any commodity right now. You may also say they import more food because they have more money to pay for it…Well, at least until this year. That’s why, West Africa for the most part, these high food prices remain a pocketbook issue and don’t have to become a food security issue.

It’s on you, Nigeria
Here we should mention Nigeria, by far the region’s largest food market. If Nigeria doesn’t prove to have a good harvest, they’ll be looking to purchase food stocks elsewhere in West Africa. Not a bad thing, if you don’t remember 2005 when food from less bountiful Niger was bought up to relieve Nigerian demand, creating a food crisis. We term 2005 a crisis because not enough food was available in Niger; this year's issue is presently due to expensive food. Countries have learned from the issue in Niger. In Burkina Faso, at least, safeguards have been put in place to make sure local markets are not needlessly losing food stocks to foreign consumers.

The prognosis for Nigeria is so-so. Droughts ruined a lot of crops in the northern part of the country, but Fewsnet hopes this could be made up from the higher than expected rains in the south. Of course, if it goes like the rest of the world, we could be in for a long dry season.

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