The coming food crisis

Yesterday, the UN\'s Food and Agriculture Organization (FAO) released its food price index for August, which showed the overall index of prices unchanged from July\'s reading. That offers some comfort to those who were worried about a looming food crisis following a 6% jump in the index in July. In real (inflation-adjusted) terms, food prices remain below the highs reached in previous peaks in early 2011 and in mid-2008. But that still leaves them at high levels by the standards of the past two decades:

Just a few days ago, the FAO, IFAD and the World Food Program issued a joint statement warning of the dangers posed by the situation in world food markets. The three bodies have emphasised that the world is now dangerously vulnerable to adverse supply shocks like the drought and heatwave now punishing the US corn belt. That\'s because \'even in a good year, global grain production is barely sufficient to meet growing demands for food, feed and fuel – this, in a world where there are 80 million extra mouths to be fed every year.\' See this infographic from the WFP describing the food price roller coaster since 2008.

Meanwhile, commentators such as David Frum warn that rising prices could turn 2013 into a year of crisis and social unrest.

This is the third major international food price spike in the past five years, with prices rising sharply over 2010-2011 to reach a record high in early 2011. Many commentators have suggested that the high prices of that year played an important role in helping to trigger the Arab Spring. [fold]

The first crisis came in 2008, when the world economy was faced with a serious problem: by June that year, more than 30 countries had experienced some form of social unrest or domestic protest triggered by high prices, and by the start of July 2008 the Managing Director of the IMF was warning that \'some countries really are at a tipping point. If food prices rise further and oil prices stay the same, some governments will no longer be able to feed their people and at the same time maintain stability in their economies.\'

While the global food crisis grabbed headlines for much of the first half of 2008, however, it was replaced in the news by another GFC – the global financial crisis – and the subsequent slump in economic activity was associated with a sharp fall in commodity prices.

In a Lowy Institute working paper published in early 2009, I took a look at some of the lessons from the 2007-08 experience, arguing that it told us some important things about life in a resource-constrained world economy, including the likelihood of higher and more volatile commodity prices and a growing vulnerability to supply shocks. In a subsequent essay for the journal Survival, Alan Dupont and I warned that the world might be facing a new era of food insecurity.

For now, at least, the experts don\'t seem to think that we are in immediate danger of repeating the 2008 crisis in 2012. The WFP has highlighted what it sees as some key differences between then and now, including higher global stocks of wheat and rice than was the case in 2008, the absence (so far) of export bans, and a backdrop of weaker global growth which means demand is more subdued. Likewise, in its latest Food Price Watch, the World Bank says that its experts \'do not currently foresee a repeat of 2008\'.

But we shouldn\'t downplay the risks. For a start, there is no doubt that countries which are heavily dependent on food imports (measured as a high share of net cereal imports as a proportion of total consumption) and where food consumption itself is a high share of household expenditure are vulnerable to current price conditions:

Moreover, the same Bank report goes on to warn that if certain risk factors did materialise – a return of export bans, a severe el Nino, a sharp increase in energy prices – then 2008-style price increases would again be likely.

Lastly, even if we manage to avoid these pitfalls this year, trends in supply and demand suggest that global food markets are set to remain tight over the longer term. That means the world – and especially the poor – will remain vulnerable to food shocks.