Tuesday, May 6, 2008

Food Riots Have Many Fathers

Food rioters in Somalia have joined those in Haiti, Egypt, Cameroon and Burkina Faso to protest the brutal jump in food prices around the world.

Culprits on both the supply and the demand side have caused the current crisis. Everything from weather to a new taste for richer foods are to blame, exacerbated by import curbs and agricultural subsidies by rich nations and export bans by poor ones. Even the well-intentioned but controversial move to biofuels has impacted markets. There may be a silver lining, though, as sky-rocketing prices and the resultant food riots around the globe might prompt some meaningful long-term changes in both trade policies and aid practices.

Weather is a well-recognized demon in the food markets, of course. Most recently, a prolonged drought in Australia's wheat belt has cut supply at the worst possible time. On top of that, though, is a long-building increase in demand for richer diets in the booming economies of China and India. Those same economies are in some part responsible for the soaring cost of oil, which makes food production and distribution an increasingly expensive proposition. The concurrent rise in the price of natural gas and potash, both used to produce fertilizer, hurts too.

Diversion of a significant part of the U.S. corn crop to ethanol production, that silver bullet meant to solve both global warming and America's addiction to foreign oil, also impacts food prices, although not significantly according to most experts. The USDA reports that American farmers grew 13.1 billion bushels of corn last year. Of that, 22% went to make about 7 million gallons of ethanol. That still left enough to feed the domestic market, push exports to record levels, and store a 10% surplus. While the price of corn has more than doubled in the last three years, it's still a very, very small factor, contributing less than 3% to the overall rise in food prices.

The biggest culprits, though, are national policies that warp the supply-demand equation. The rich nations aren't the only ones to blame, either. Both India and Vietnam, the world's number 2 and 3 rice-exporting countries, have imposed limits or complete bans on rice shipments outside their borders in order to shield their own populations from the perceived shortages. Indonesia enacted similar measures. The ripples have been felt as far away as the U.S., where major retailers have put limits on the amount of rice that customers can buy. Considering that worldwide rice production was up in 2007, this can only be a result of increased demand.

Unfortunately, export restrictions also reduce local farmers' incentives to grow more since lack of access to international markets reduces their return. Meanwhile, an even greater portion of the world's food supply must come from high-cost producers in North America and Europe, both big exporters, but both also heavy subsidizers of their own farmers. The rich nations' protective import restrictions further reduce the poor farmers' chances of competing in world markets, thereby giving them little reason to plant at more than subsistence levels.

All this has created turmoil in world food markets, which may in turn create some real policy changes at several levels. The current round of global trade talks broke off twice in the past two years, mainly over the issues of subsidies and price controls. With food riots spreading, however, it's becoming harder and harder to justify crop price support systems. Business Week reports that there's optimism about change from both sides of the table, quoting positive statements from Indian and U.S. trade officials. Even the American Farm Bureau Federation says there's room for change in their normally protectionist stance. They are far from the only parties to the talks, however, so nothing is certain.

Another long-overdue change may come in U.S. food aid policy, which has persistently required developing nations to use the rescue funds to purchase American crops and transport them on American ships. George Bush's recent call for not only another $770 million in emergency food aid but for 25% of that to be purchased from local producers in recipient regions is a positive sign. It remains to be seen, of course, whether the super-influential U.S. farm lobby will allow that to happen.

Dave Donelson, author of Heart of Diamonds

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