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The coming hunger: Record food prices put world 'in danger', says UN
Perfect storm of climate and oil puts world into 'danger territory'

By Sean O'Grady, Economics Editor
Thursday, 6 January 2011

Food riots, geopolitical tensions, global inflation and increasing hunger among the planet's poorest people are the likely effects of a new surge in world food prices, which have hit an all-time high according to the United Nations.

The UN's index of food prices – an international basket comprising wheat, corn, dairy produce, meat and sugar – stands at its highest since the index started in 1990, surpassing even the peaks seen during the 2008 food crisis, which prompted civil disturbances from Mexico to Indonesia.

"We are entering danger territory," said the UN Food and Agriculture Organisation's chief economist, Abdolreza Abbassian.

Global food prices have risen for the sixth month in succession. Wheat has almost doubled since June, sugar is at a 30-year high, and pork is up by a quarter since the beginning of 2010.

The trends have already affected the UK where the jump in food prices in November was the highest since 1976. Meat and poultry were up 1 per cent and fruit by 7.5 per cent in one month.

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One concern, especially in Ukraine and Russia, is that the cold winter, following disastrous droughts and summer fires, will have damaged the seeds for next year's crops, leading to an even more acute crisis than seen last year. Government policies, especially the export bans imposed by nervous Indian and Russian governments, have exacerbated such problems in world markets.

Meanwhile, burgeoning consumption in the booming economies of east Asia and the pressure exerted by the demand for crops for biofuels rather than food, especially in the US, is adding to the unprecedented squeeze on world food supplies.

The latest surge in crude oil prices adds to the risk of turmoil. Many experts say oil prices show few signs of abating, and the price of a barrel is set to breach the $100 barrier again soon. Opec officials yesterday said they were happy with such a level. Oil peaked at just under $150 a barrel in 2008; any sign of renewed tension in Iran would see the price exceed that. Higher oil prices add to food price inflation by increasing transportation costs.

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Prices for food commodities have surged in recent months, with our Goldman Sachs Commodity Agriculture & Livestock index up 60% since its recent trough in mid-June 2010.

Higher food costs have yet to reach the retail level. Our analysis suggests an average lag of seven months from commodity price changes to retail food price changes. Typically, retail food prices move about one-tenth as much as commodity prices. Of course, there is significant variation in both the time lag and the degree of pass-through in individual episodes.

If commodity prices held steady at current levels, we would expect to see consumer food inflation accelerate from roughly 1% over the past year to about 5% in mid-2011, contributing about ½ point to the headline Consumer Price Index. Pass-through into core could also be a few tenths of a percentage point, although there is considerable variation around this outcome. These results suggest that the burst of food inflation seen thus far poses modest upside risk to our current inflation forecasts, but not a major threat to the broader economic outlook.

Prices for food commodities have surged in recent months. Cash prices of grains such as corn and wheat have nearly doubled over the past half-year. Our Goldman Sachs Agriculture & Livestock index, a component of the overall GS Commodity Index, is up 60% since its recent trough in mid-June 2010.

Despite the sharp increases in farm prices, higher food costs have yet to reach the retail level. The food component of the Consumer Price Index is up just 0.8% since mid-2010 and 1.5% year-over-year. Commodity prices and consumer prices for food diverge for two main reasons:

1. Other costs dilute the effects of raw commodity price changes. Commodity food costs are only a small portion of the final consumer prices of food. Even raw vegetables at the grocery store incorporate some labor and transportation costs associated with getting the product from the farm to the store shelf. Much of the food that consumers purchase has been processed considerably and packaged, adding further layers of cost. And the food CPI includes food served at restaurants, which incorporates further costs of service. All of these other costs generally move much less than commodity food prices, diluting the effect at the consumer level. As a rough rule of thumb, we find retail food prices move a bit less than one-tenth as much as our GSCI Agriculture & Livestock index.

2. Time lags from farm to store. It takes time for commodity price changes to be reflected at each stage of the food production chain. On average, we find the highest correlation between commodity and retail food price changes at a seven-month lag.

Illustrative Food Price Pass-Through and Lag Times



To estimate the likely impact of the sharp rise in food commodity prices on the Consumer Price Index, we constructed a model linking the food CPI to 1) the GSCI Ag/Livestock index and lags, 2) lagged core CPI inflation (as a proxy for the underlying inflation trend), and 3) capacity pressures, specifically the capacity utilization rate in the food manufacturing sector and the unemployment rate. Using quarterly data from 1985 through 2010, the model suggests that if food commodity prices stayed at current levels, the 60% increase in food commodity prices to date would push food CPI inflation to around 5% (annualized) in Q2 and Q3 2011. On a year-over-year basis, the food CPI would probably peak in the 4%-4½% range.



What does this mean for the more commonly followed headline and core CPI measures? The total effect on the CPI includes both direct and indirect effects. Food has a relative importance weight of 13.7% in the overall CPI, so the sort of acceleration we envision would make a direct contribution of approximately ½ percentage point to headline CPI inflation in mid-to-late 2011.

Food inflation also could have indirect effects on the CPI by pushing up prices of specific items within the core index. This could occur because companies in other sectors provide food to their employees or to customers as part of their business, and are able to pass the incremental food input cost on in their final prices. Or it could conceivably occur if higher food price inflation nudged up inflation expectations, which then affected wages and/or prices more broadly. In any event, we do find some evidence that food prices push up core inflation slightly (specifically, core goods and some core services, but not rents). Food price inflation in the CPI along the lines of the scenario above might push up core inflation a few tenths of a percentage point over the subsequent year; though as with pass-through from commodity to CPI food inflation, results can vary significantly from one episode to the next.

In summary, the recent surge in food commodity prices poses upside risk to both our core and headline CPI forecasts, particularly the latter. The rise in food costs should push up headline CPI inflation by roughly ½ point even without meaningful pass-through effects into the core index, reducing household real income growth accordingly. While clearly undesirable from the standpoint of households, these results suggests that as long as commodity prices stabilize relatively soon, the burst of food inflation would not have a major impact on the broader economic outlook.

The Canary In The Inflationary Coal Mine Is In Southeast Asia, from Sovereign Man

Laos is a small, landlocked economy in Southeast Asia that's often overlooked in favor of its neighbors: Thailand, China, and even Cambodia. But there are a few important factors that set Laos apart and lead me to believe that, when it comes to inflation, the country is the canary in the coal mine.

First, Laos is one of the most sparsely populated countries in Asia; with just 6.3 million people, its numbers pale in comparison to regional neighbors such as Burma (50 million), Thailand (67 million) and Bangladesh (162 million).

The other thing that's important about Laos is that the country is home to some of the most fertile soil in the world: more than 20% of its land mass is ripe for agricultural use. This is an astounding number, and it's no wonder that agriculture makes up the preponderance of the Laotian economy.

Put another way, Laos, with its vast resources and small population, might loosely be considered an agricultural version of Kuwait. But Laos is nowhere near as wealthy, since oil is much pricier than rice, soy, and fish.

Given its resources, it certainly seems ironic that the prices of staple foods in Laos, including rice, have soared in recent months, and that the Laotian government is now under intense pressure to "do something" about it.

You expect this sort of thing to happen in Algeria, where the population is 35 million, where only 2% of the land is cultivated, and where agriculture makes up but a tiny percentage of the economy... but in Laos? This is akin to finding Kuwaitis unable to afford filling up their cars due to high gas prices. It's unthinkable.

Thing is, it's not that there are food shortages in Laos; this isn't an issue where supply has failed to keep up with demand (thus resulting in rising prices). The price hikes are simply another indicator of monetary inflation causing severe price inflation, particularly in the developing world.

How does this happen? The trillions of new currency units being compulsively manufactured by central bankers are finding their way to developing countries. This surge heats up local markets, causing prices to rise.

This effect is compounded when developing markets fight to keep their currencies artificially depressed against the dollar. When the price of milk goes up by a dollar in the developed world, people grumble about it, but they can afford it. In Laos, where the minimum wage is about $65/month, an extra few dollars for groceries is unfathomable.

The government in Laos will most likely raise the minimum wage. The figure that's being discussed is about a 40% increase from today's level, which itself is nearly double the minimum wage in 2009.

Rising wages like this are a common ingredient in hyperinflation, spawning a vicious cycle of higher prices, which then beget higher wages, which then beget higher prices, and so on. Wage hikes are always playing catch-up with rising prices, and the end result is a reduced standard of living. No amount of monetary wizardry can prevent this.

I saw a similar case when I was in Sri Lanka a few months ago: the government there keeps the rupee fixed to the US dollar at an artificially low rate in order to support exporters... yet the weak rupee has hit the locals hard, causing soaring prices of 30% or more for staple foods such as rice and coconuts.

When I was in Zimbabwe recently, the locals told me similar stories about their days of hyperinflation: everyone was constantly getting a "raise" to keep up with inflation, but prices were adjusting so rapidly, their living conditions would constantly deteriorate.

Needless to say, banks do just fine in this situation. All the freshly printed money circulates through the banking system, generating greater volume and higher profits. It's no coincidence that Laos' largest commercial bank (BCEL) is expecting its net income to surge 27% this year, and I'll be curious to see what happens to the Laotian stock market (which just had its inaugural session last week).

Bottom line: if this sort of thing can happen in Laos, where there's about 2.5 acres of lush, fertile, arable land for every man, woman, and child in the country, it can happen anywhere... and I'll be watching this situation very closely to see if any civil unrest develops as a result.

Regardless, inflation is here. And the more you see politicians and central bankers denying it, the more you should be preparing for what may come. More to follow.

A large number of young Omanis took to the streets in a peaceful protest march in the Al Khuwair district where most of the
government offices are located.

The youth, protesting against the general conditions such as soaring price rise and growing unemployment, were allowed to walk in a procession although there was heavy police presence.

According to witnesses, the youth dispersed peacefully after an hour-long protest near the Ministry of Housing and Interior Ministry building.

Though the ministry area was deserted when the protest was held at government department as the staff work only up to 2.30pm. the main Sultan Qaboos Highway saw a huge traffic jam of office goers from the private sector heading home. The curious drivers slowed down the traffic, triggering congestion.

"I could see a huge crowd in the ministry area and the traffic was crawling," an expatriate, who wished not to be named, told Gulf News.

Most participants in the protest were reluctant to be quoted as they were government employees. However, some said they protested against low salaries and soaring prices.

The police kept track of the protesters even as some joggers continued with their routine. The police did not interfere and the protest ended as peacefully as it had started.

The Royal Oman Police (ROP) had no comment to make when Gulf News contacted for details about the protest.

This is not the first time such peaceful protest was held in Oman. Recently some young graduates led a delegation to the Education
Ministry, demanding teaching jobs.

Meanwhile, social media was abuzz with the news about the protest.

Turabi's arrest comes at a politically sensitive time for the government of President Omar Hassan al Bashir, who stands to lose control over the oil-producing south which last week voted in an independence referendum.

It also comes as Tunisia grapples with fallout from the ouster of its long-time president Zine al-Abidine Ben Ali, who fled the country on Friday after three weeks of violent unrest sparked by social grievances.

Sudan's opposition threatened on Sunday to take to the streets if the government did not remove its finance minister and dismantle parliament over the decision to raise prices on a range of goods.

"This is criminal - how can they arrest a man who is 78 years old and put him in prison? We are scared for him," Turabi's tearful wife Wisal al-Mahdi told Reuters.

Ben Ali's overthrow in Tunisia has reverberated across the Arab world, raising concerns about stability in other countries in the region which share the same mix of social, economic and political problems.

Sudan's price increases have sparked student protests in the country's northern agricultural heartland and Khartoum.

The country is grappling with a current account deficit and a currency devaluation that is driving up inflation.

This month Khartoum cut subsidies on petroleum products and key commodity sugar, prompting protests over the past week, quelled only by baton-wielding police firing teargas.

A column in Business Insider syncs for the most part with my own thinking, and also provides a clear explanation of why the United States is in deflation even though some prices are rising.

The majority in the US and around the world are being robbed on both ends