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January 6, 2011

Delivery, but where's the cash? Update on the Global Fund

January 6, 2011

World food prices hit record high, so why no riots?

January 6, 2011
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According to the Financial Times, the FAO has just reported that world food prices are now higher than their peak FAO food prices 0111during the ‘food price crisis’ of 2008 (see graph). But the last spike was marked by riots in some 30 countries, global emergency meetings, new initiatives etc. Why is everything so quiet this time around? Some possible explanations

Domestic prices aren’t as badly affected. Some of the spike is due to a weak US currency, (the FAO uses dollars for world food prices on its excellent global tracking site, source of the graph). The FAO site’s national data aren’t up to date, so hard to check this – anyone got independent sources of info?

Consumers have got used to higher prices, so aren’t reacting as violently this time around.

The main rises have been in sugar, meat and oil seeds, not the more politically explosive cereals responsible for most of the riots last time (wheat prices are rising fast, but have not yet reached their 2008 levels, while rice is relatively stable).

Most donors are busily cutting or freezing their aid budgets so any civil servant suggesting a new initiative may not get much of a hearing.

As for causes, the Guardian quotes Julian Jessop, chief international economist at Capital Economics, as saying “the surge in agricultural food prices is largely a consequence of supply shocks, such as droughts in major wheat producing countries. These have been compounded by speculative pressures.”

Update: for more on this (and an identical title, but I was first Alex!) see Alex Evans on Global Dashboard

10 comments

  1. It is still time for donors to take the higher prices of food into account in their spending allocations, e.g. for humanitarian aid.

    Of course the question of aid efficiency counts: if/when cash transfers are more economical for feeding the hungry, more can be done with less money.

  2. No riots? Did the FAO see what happened in Algeria yesterday? See today’s Le Monde. Several people died in protest for the price increases.

    Contrary to what happened in 2008, in this case the situation is just starting. We can expect further increases because of systemic components like fuel prices (still to increase) and failure in key commodities are still happening.

    I don’t see Europe, Japan or the USA making fundamental changes on their interest rates, which means that the main macro economic drivers will stay there and the prices should continue increasing.

    It will be good to see what the Food Security summit that will take place in Berlin within a couple of weeks will say.

    The responses from the G20 and from the Committee on Food Security will be crucial.

  3. Firstly, I think your suggestion that consumers are more used to high prices plays a role. Secondly, as we have had a few years with general turbulence, people are perhaps not as surprised, and feels less betrayed.

    On the question of development assistance budgets, currencies, and the like, I would like to comment a few things.

    1. The peculiarity of 2008 was the reverse relationship between the value of the dollar and the price of raw materials, especially oil and silver.

    2. Most recessions in the post-war era coincide with oil-price spikes, and most oil-price spikes coincide with recessions.

    As oil prices have started to rise again, although less consistently than three years ago, the inverse relationship between raw material prices and the dollar appears to have returned. In my opinion, considering the general weak status of global economic indicators, this indicates increase in the risk for a new global recession, and/or the return of the volatility we experienced in 2008.

    With ever increasing pressure on government budgets from a new economic downturn, we should expect subsidies to be cut (like in Bolivia), price risk to increase (perhaps we should start preparing for a another 2008), and reduced aid budgets.

  4. Weren’t there just some food riots in Tunisia and Algeria? And the garments workers in Bangladesh are still fighting for higher wages citing food price rises. But it is different. Perhaps people have adapted?

  5. I think it’s not just people getting used to higher prices. Everybody , leaders and consumers, saw prices soar and then collapse again in just 6 months. It’s human nature to think the same thing will happen again. Is there any evidence that this rise won’t just collapse as quickly as the last one ?

  6. @ Ken Smith:
    A new recession would almost inevitably lead to a collapse in prices. The second scenario, increased volatility but no recession, leaves with, exactly, volatility. Prices will fluctuate wildly, which will not benefit consumers much, rather speculators.

    Only the future will tell, but my guess is that we will see increased level of tensions either way, and we will see falling food prices – at some point – either way.

  7. Funny to find back to this post now. In retrospect, You blew it badly on this one, Duncan :).

    However, I think we can also claim that social turbulence comes with a certain lag.

    For instance, when Malawi erupted a few weeks back, it had been brewing for a very long time. So had Egypt, for instance.

    Duncan: Can I get away with a prescient question, if not the right answer?…..

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