Food crisis

It’s been called the silent tsunami1 – the global food crisis that is adding inexorably to
starvation’s daily death toll. With 862 million people in the world already malnourished,2
rocketing food prices are pushing another 100 million people into dire poverty.3
Weakened by want, they too will be at risk of the diseases that prey on the hungry, and
account for the 25,000 deaths4 each day that take place at present from hunger-related
causes.
This is a crisis of man’s making, not nature. Last year, according to the Food and Agriculture
Organisation of the United Nations (FAO), there was enough food grown to meet the
nutritional needs of every person on the planet.5
A ‘perfect storm’ has now arisen, however, in which underlying long-term problems
affecting agricultural production have been exacerbated by other factors, sending global
food prices soaring and causing acute shortages of staple foods in at least 37 countries.6
The FAO has warned that US$30 billion a year is needed to avert further shortages.7 As well
as humanitarian concerns, there are security implications too. With food riots in more than
30 countries,8 the FAO fears the very real prospect of conflict over food resources.
As ever, it is the world’s poor who are being hit the hardest. As much as 70 per cent, and
sometimes more, of their already meagre incomes must now go on feeding themselves and
their families.9 The plight of the very poorest, such as slum-dwellers, the displaced and those
with HIV, is of particular concern.
One major long-term cause of the shortages is that, in return for trade and aid, poor countries
have been forced by wealthy governments, and international financial institutions, to accept
a raft of trade liberalisation measures that have had a ruinous effect on their ability to feed
themselves.
As the international community struggles for a solution to the present crisis, Christian Aid
believes that fundamental changes are needed to the manner in which the international
community seeks to influence agricultural and trade policies in the developing world.
Policies that govern international trade and the lending of money to developing countries,
and underpin pledges of support and assistance, must be radically reviewed. Nothing
less than a pro-poor revolution in agricultural thinking is needed now to prevent such
emergencies recurring with remorseless regularity.
1 Fighting food shortages Hungry for change
Introduction
Causes of the crisis
The reason that a rise in global food prices matters so much
to the world’s poor is that many poor countries do not grow
enough food. Instead they have to buy their supplies from
abroad, and recently prices have more than doubled.
Even in countries that do grow sufficient food for their own
needs, consumers are also facing higher prices once other
factors such as rising transport costs come into play. In the
first three months of 2008 all major food commodities hit their
highest price in real terms for nearly 30 years.10
To understand the reason that the world’s poor have been
left helpless in the face of rising food prices, it is important
to examine the disastrous policy decisions forced on their
governments in recent years.
Imbued with a doctrinaire belief in ‘free trade’ as the
engine of growth, rich donor nations and international financial
institutions have made a number of key interventions.
Trade liberalisation
This has generally been imposed as part of a package of
‘reforms’ demanded in return for aids and loans. Poorer
countries have been forced to remove protective tariffs from
agricultural produce, leaving their markets open to heavily
subsidised food exports from richer nations. This system
undercuts local farmers and agricultural businesses, and
many have gone out of business. Donors have also forced
governments to reduce subsidies on agricultural ‘inputs’, such
as seeds and fertiliser, and lift price controls. Government
agricultural boards that would once have bought stock during
times of surplus to hold food in readiness for times of shortage,
thus stabilising prices, have been closed down. In Malawi, for
instance, any national grain surplus would once have been
bought from farmers and then used as a reserve during poor
harvests. More recently, however, the surplus has been sold
for cash (with the assumption that it would always be possible
to import grain during a crisis).11
State banks that would once have agreed loans for
agricultural production have also been closed.
The Economic Partnership Agreements (EPAs) that the
European Commission has endeavoured to push on African,
Pacific and Caribbean countries will only exacerbate matters.
In countries that have signed, these agreements will open up
free trade still further, depriving governments of the necessary
policy tools to protect and harness local productivity.
Under-investment in food production
Twenty years ago, some 20 per cent of foreign aid spent by
rich countries went to help agriculture in the developing
world. By 2006 that figure had fallen to less than 3 per
cent.12 Health and education projects took precedence.
Spending by African governments, meanwhile, is massively
tilted towards urban areas. Five years ago African heads of
government committed to allocating at least 10 per cent of their
budget to agriculture and rural development by 2008. This year
the African Union said data from 24 countries showed that just
six had reached that target. Average rural investment among
the 24 was 6.6 per cent.13 With food prices low for the past
30 years, there was an assumption that at times of shortage,
food could always be purchased elsewhere. While this remains
true – there is still enough food in the world to feed everyone –
it does not take into account the volatility of world food prices,
especially in times of shortage or as a result of hoarding and
speculation. Poor countries dependent on imports of staple
foods now find themselves without sufficient foreign exchange
to pay for these imports, and are again forced to beg for special
loans from the International Monetary Fund (IMF).
Cash crops
With the opening up of markets, donors and corporations have
promoted cash crops (such as flowers, tobacco or biofuels) for
export. The most productive land is then used to grow these
crops, squeezing out domestic food producers. Although the
intention has been to raise the incomes of marginal producers,
such crops have reduced agricultural diversity, and left countries
reliant on importing staples from abroad. Investing equally in
staple crop production would have reduced the risks of food
shortages and enhanced opportunities for development.
Small-scale subsistence farmers – including the more
vulnerable, especially women and members of marginalised
groups such as ethnic minorities – have been worst hit by the
effects of such policies. In the most extreme cases they have
been driven off their land and denied access to water and other
resources. Instead of protecting these vulnerable people, and
pursuing pro-poor policies to tackle exclusion, inequality and
hunger, governments have focused increasingly on ‘export-led
growth’.
As a result of this long-term under-investment in food
production, domestic farming sectors have been weakened,
and countries left over-reliant on expensive food imports.
Following the damage done to the agricultural sector, many
2 Fighting food shortages Causes of the crisis
US$30 billion a year is needed to avert future
shortages and potential conflict over supplies.
farmers are in no position to respond to growing shortages
when the supply of subsidised food stuffs from richer countries
stops.
In poorer countries, especially in sub-Saharan Africa,
which already struggled to produce enough food, agricultural
production has stagnated or fallen. Some sub-Saharan countries
have moved from being net food exporters to importers as a
result of trade liberalisation.
Roughly 65 per cent of the population of sub-Saharan
countries relies on subsistence farming,14 with the typical
farmer a woman with no fertiliser, no high-yield seeds, no
irrigation and no medication for her livestock.15 Such farmers
face real difficulties, but with the right support they can increase
production and sales.
Even middle-income countries such as Guatemala and
Egypt have gone from being food exporters to net importers
over the past 10-15 years.
The pattern has been followed elsewhere. In Sri Lanka,
food imports doubled between 1985 and 1998 following the
liberalisation of agriculture, while agricultural production fell,
leading to massive job losses in rural areas.16
In Jamaica, imports of vegetable oils between 1995 and
2000 were more than double the imports between 1990 and
1994, and domestic production fell by 68 per cent.17
When trade was liberalised in Haiti in the 1990s after
pressure from the World Bank and the IMF, rice production
slumped, precipitating a huge influx of heavily subsidised rice
from the United States.18
In Ghana, where tomato cultivation was widespread, World
Bank and IMF policy conditions led to the import of heavily
subsidised processed tomato preserves from the EU increasing
by 628 per cent between 1993 and 2003. Two local canning
factories were forced to close and, according to the Interchurch
Organisation for Development Cooperation, tomato growers
throughout the country ‘continue to face extreme hardship’.
Why now?
There are several key factors precipitating the current crisis.
Price of oil
The price of oil has more than doubled over the past year,
pushing up transport costs as well as the costs of fertiliser,
seeds, pump irrigation, food processing and other agricultural
necessities. Josette Sheeran, executive director of the World
Food Programme (WFP), said recently: ‘The world’s misery
index is rising.’ She had just returned from a trip to Kenya’s
Rift Valley where, with agriculture already seriously disrupted
by violence around the elections in December 2007, the cost
of fertiliser had climbed 135 per cent in a matter of months.19
That increase, along with rising prices for seed, and continued
instability, led farmers to plant only one third of the crops they
planted last year. Elsewhere in the world, higher prices have
simply meant less farming. ‘Farmers have no access to credit,
so when prices go up, they can’t afford to plant,’ said Ms
Sheeran.
Climate change
In recent years droughts and other extreme weather events
have hit some of the world’s main grain-exporting countries hard,
as noted by the Intergovernmental Panel on Climate Change in
its Fourth Assessment Report late in 2007.20 In particular, poor
harvests in Europe and Australia in 2006 and 2007 have led
to low levels of global stocks, especially of wheat and maize.
In all five of the countries in Latin America and the Caribbean
currently listed as in crisis and requiring external assistance –
Bolivia, Ecuador, Nicaragua, Haiti and the Dominican Republic
– flooding is one of the problems to have hit farmers.21 And in
Central America and the Caribbean, Bangladesh and Burma,
hurricanes and cyclones have destroyed entire harvests in a
single day. Across sub-Saharan Africa, more erratic rainfall has
led to drought and frequent crop failure. Scientists say that the
evidence that the climate is changing is ‘unequivocal’, with
greenhouse gas emissions caused by humans more than 90
per cent likely to be the main cause.22
Biofuels
US demand for ethanol as fuel, which has seen production soar
from 1,300 million gallons in 1997 to an estimated 6,500 million
gallons in 2007,23 has led to the diverting of maize from food to
biofuel throughout the Americas. Today ethanol is blended into
more than 50 per cent of the petrol sold in the US.24 On the
eve of the FAO summit in June, US Secretary of Agriculture Ed
Schafer defended the use of ethanol, saying biofuel production
had only contributed ‘2-3 per cent’ to food price rises.25 In May,
however, John Lipsky, first deputy managing director of the
IMF, said: ‘…biofuel policies in some advanced economies are
spilling over to the price of key food items, particularly corn and
soya bean. IMF estimates suggest that increased demand for
biofuels accounts for 70 per cent of the increase in corn prices,
3 Fighting food shortages Why now?
‘The world’s misery index is rising.’
Josette Sheeran, executive director of the World Food Programme
and 40 per cent of the increase in soya bean prices.’26
America’s growing demand for biofuel is having a
particularly devastating impact on Latin America and the
Caribbean. These two areas have relied heavily in recent years
on imports of maize from the US because of trade liberalisation.
The diversion of traditional crops to biofuel production also
gives rise to aggressive expansion of crops such as sugar and
African oil palm. In some countries this has led to subsistence
food producers being violently evicted from their land.27 Some
biofuels (for example jatropha) may have a role to play as part
of a sustainable, mixed-crop approach, helping to meet local
energy needs and protecting soil quality. However, commercial
biofuel plantations can push small-scale farmers off their land
and monopolise water supplies, squeezing out domestic food
production.
As a means of combating climate change, recent science
suggests that ethanol from maize does not actually produce
very significant carbon savings. Rich countries need to reduce
their use of all carbon-emitting fuels, including biofuels. The
overriding priority for the climate is to make deep and swift cuts
in emissions.
Market trends
Price volatility
From rice to soya beans, prices today are very volatile. The
factors accounting for this include the weak dollar, fluctuating
exchange rates and commodity market speculation linked to
future food prices.
Speculation
Commodity prices have been drifting upwards for the past sixand-
a-half years, a process that has recently accelerated. Hedge
funds moving in on this form of commodity trading recognised
the ‘extraordinary profitability’ of agricultural produce if food
shortages became prevalent.28 Michael Masters, a hedge fund
expert, told a US senate committee in May 2008: ‘You have
asked the question “Are institutional investors contributing to
food and energy price inflation?” And my unequivocal answer
is yes… What we are experiencing is a demand shock coming
from a new participant in the commodities futures market:
institutional investors.’ Masters said these included corporate
and government pension funds, sovereign wealth funds and
university endowments. Assets allocated to commodity index
trading strategies, he said, ‘have risen from $13 billion at the
end of 2003 to $260 billion as of March this year’.29 The prices
of the 25 commodities he included in his survey, including
nine agricultural products such as wheat, corn and soya beans,
as well as cattle and pigs, had risen by an average of 183 per
cent over the five years in question. So popular has this form
of trading become that several banks, including Barclays and
Deutsche Bank, have launched agricultural commodity index
funds. Part of the reason for this is excessive liquidity – too
much money is chasing a limited supply of commodity-based
assets. The result has been an increase in market values, which
has fed directly into price inflation.
Protectionism
Some major food-producing countries have begun to limit
exports during the present crisis to protect their own stocks,
cutting supply and raising prices still further.
Growing demand for meat
There has been increased demand for meat among the
emerging middle classes in some developing countries, largely
fuelled by increased prosperity and a change of eating habits.
Livestock requires feed. Raising cattle also utilises large areas
that could otherwise be used for crop production.
Population and urbanisation
Population growth is partly to blame for the inability of poor
countries to feed themselves. Africa is the worst hit by the
present shortages, with 21 countries at present in crisis and
requiring external assistance.30 The continent’s population
almost doubled between 1975 and 2000 to 794 million, and is
expected to show a similar increase by 2030.31
In Asia, where ten countries are in crisis and need help,32
the population increased by 1.2 billion between 1975 and 2000,
and is expected to do so again by 2030.33
And in Latin America and the Caribbean, where five
countries are in crisis and need outside intervention34, the
population grew by 187 million to 519 million between
1975-2000, and is expected to rise by a further 204 million35 by
2030.
But it isn’t necessarily the countries which have experienced
rapid population growth that are hungry now. China, which
accounts for a significant proportion of Asia’s population
growth, is relatively food-secure. With the appropriate
supportive framework, rapid population growth can generate
‘Biofuel policies in some advanced economies are
spilling over to the price of key food items, particularly
corn and soya beans.’
John Lipsky, first deputy managing director of the IMF
4 Fighting food shortages Market trends
It’s been called the silent tsunami1 – the global food crisis that is adding inexorably to
starvation’s daily death toll. With 862 million people in the world already malnourished,2
rocketing food prices are pushing another 100 million people into dire poverty.3
Weakened by want, they too will be at risk of the diseases that prey on the hungry, and
account for the 25,000 deaths4 each day that take place at present from hunger-related
causes.
This is a crisis of man’s making, not nature. Last year, according to the Food and Agriculture
Organisation of the United Nations (FAO), there was enough food grown to meet the
nutritional needs of every person on the planet.5
A ‘perfect storm’ has now arisen, however, in which underlying long-term problems
affecting agricultural production have been exacerbated by other factors, sending global
food prices soaring and causing acute shortages of staple foods in at least 37 countries.6
The FAO has warned that US$30 billion a year is needed to avert further shortages.7 As well
as humanitarian concerns, there are security implications too. With food riots in more than
30 countries,8 the FAO fears the very real prospect of conflict over food resources.
As ever, it is the world’s poor who are being hit the hardest. As much as 70 per cent, and
sometimes more, of their already meagre incomes must now go on feeding themselves and
their families.9 The plight of the very poorest, such as slum-dwellers, the displaced and those
with HIV, is of particular concern.
One major long-term cause of the shortages is that, in return for trade and aid, poor countries
have been forced by wealthy governments, and international financial institutions, to accept
a raft of trade liberalisation measures that have had a ruinous effect on their ability to feed
themselves.
As the international community struggles for a solution to the present crisis, Christian Aid
believes that fundamental changes are needed to the manner in which the international
community seeks to influence agricultural and trade policies in the developing world.
Policies that govern international trade and the lending of money to developing countries,
and underpin pledges of support and assistance, must be radically reviewed. Nothing
less than a pro-poor revolution in agricultural thinking is needed now to prevent such
emergencies recurring with remorseless regularity.
1 Fighting food shortages Hungry for change
Introduction
Causes of the crisis
The reason that a rise in global food prices matters so much
to the world’s poor is that many poor countries do not grow
enough food. Instead they have to buy their supplies from
abroad, and recently prices have more than doubled.
Even in countries that do grow sufficient food for their own
needs, consumers are also facing higher prices once other
factors such as rising transport costs come into play. In the
first three months of 2008 all major food commodities hit their
highest price in real terms for nearly 30 years.10
To understand the reason that the world’s poor have been
left helpless in the face of rising food prices, it is important
to examine the disastrous policy decisions forced on their
governments in recent years.
Imbued with a doctrinaire belief in ‘free trade’ as the
engine of growth, rich donor nations and international financial
institutions have made a number of key interventions.
Trade liberalisation
This has generally been imposed as part of a package of
‘reforms’ demanded in return for aids and loans. Poorer
countries have been forced to remove protective tariffs from
agricultural produce, leaving their markets open to heavily
subsidised food exports from richer nations. This system
undercuts local farmers and agricultural businesses, and
many have gone out of business. Donors have also forced
governments to reduce subsidies on agricultural ‘inputs’, such
as seeds and fertiliser, and lift price controls. Government
agricultural boards that would once have bought stock during
times of surplus to hold food in readiness for times of shortage,
thus stabilising prices, have been closed down. In Malawi, for
instance, any national grain surplus would once have been
bought from farmers and then used as a reserve during poor
harvests. More recently, however, the surplus has been sold
for cash (with the assumption that it would always be possible
to import grain during a crisis).11
State banks that would once have agreed loans for
agricultural production have also been closed.
The Economic Partnership Agreements (EPAs) that the
European Commission has endeavoured to push on African,
Pacific and Caribbean countries will only exacerbate matters.
In countries that have signed, these agreements will open up
free trade still further, depriving governments of the necessary
policy tools to protect and harness local productivity.
Under-investment in food production
Twenty years ago, some 20 per cent of foreign aid spent by
rich countries went to help agriculture in the developing
world. By 2006 that figure had fallen to less than 3 per
cent.12 Health and education projects took precedence.
Spending by African governments, meanwhile, is massively
tilted towards urban areas. Five years ago African heads of
government committed to allocating at least 10 per cent of their
budget to agriculture and rural development by 2008. This year
the African Union said data from 24 countries showed that just
six had reached that target. Average rural investment among
the 24 was 6.6 per cent.13 With food prices low for the past
30 years, there was an assumption that at times of shortage,
food could always be purchased elsewhere. While this remains
true – there is still enough food in the world to feed everyone –
it does not take into account the volatility of world food prices,
especially in times of shortage or as a result of hoarding and
speculation. Poor countries dependent on imports of staple
foods now find themselves without sufficient foreign exchange
to pay for these imports, and are again forced to beg for special
loans from the International Monetary Fund (IMF).
Cash crops
With the opening up of markets, donors and corporations have
promoted cash crops (such as flowers, tobacco or biofuels) for
export. The most productive land is then used to grow these
crops, squeezing out domestic food producers. Although the
intention has been to raise the incomes of marginal producers,
such crops have reduced agricultural diversity, and left countries
reliant on importing staples from abroad. Investing equally in
staple crop production would have reduced the risks of food
shortages and enhanced opportunities for development.
Small-scale subsistence farmers – including the more
vulnerable, especially women and members of marginalised
groups such as ethnic minorities – have been worst hit by the
effects of such policies. In the most extreme cases they have
been driven off their land and denied access to water and other
resources. Instead of protecting these vulnerable people, and
pursuing pro-poor policies to tackle exclusion, inequality and
hunger, governments have focused increasingly on ‘export-led
growth’.
As a result of this long-term under-investment in food
production, domestic farming sectors have been weakened,
and countries left over-reliant on expensive food imports.
Following the damage done to the agricultural sector, many
2 Fighting food shortages Causes of the crisis
US$30 billion a year is needed to avert future
shortages and potential conflict over supplies.
farmers are in no position to respond to growing shortages
when the supply of subsidised food stuffs from richer countries
stops.
In poorer countries, especially in sub-Saharan Africa,
which already struggled to produce enough food, agricultural
production has stagnated or fallen. Some sub-Saharan countries
have moved from being net food exporters to importers as a
result of trade liberalisation.
Roughly 65 per cent of the population of sub-Saharan
countries relies on subsistence farming,14 with the typical
farmer a woman with no fertiliser, no high-yield seeds, no
irrigation and no medication for her livestock.15 Such farmers
face real difficulties, but with the right support they can increase
production and sales.
Even middle-income countries such as Guatemala and
Egypt have gone from being food exporters to net importers
over the past 10-15 years.
The pattern has been followed elsewhere. In Sri Lanka,
food imports doubled between 1985 and 1998 following the
liberalisation of agriculture, while agricultural production fell,
leading to massive job losses in rural areas.16
In Jamaica, imports of vegetable oils between 1995 and
2000 were more than double the imports between 1990 and
1994, and domestic production fell by 68 per cent.17
When trade was liberalised in Haiti in the 1990s after
pressure from the World Bank and the IMF, rice production
slumped, precipitating a huge influx of heavily subsidised rice
from the United States.18
In Ghana, where tomato cultivation was widespread, World
Bank and IMF policy conditions led to the import of heavily
subsidised processed tomato preserves from the EU increasing
by 628 per cent between 1993 and 2003. Two local canning
factories were forced to close and, according to the Interchurch
Organisation for Development Cooperation, tomato growers
throughout the country ‘continue to face extreme hardship’.
Why now?
There are several key factors precipitating the current crisis.
Price of oil
The price of oil has more than doubled over the past year,
pushing up transport costs as well as the costs of fertiliser,
seeds, pump irrigation, food processing and other agricultural
necessities. Josette Sheeran, executive director of the World
Food Programme (WFP), said recently: ‘The world’s misery
index is rising.’ She had just returned from a trip to Kenya’s
Rift Valley where, with agriculture already seriously disrupted
by violence around the elections in December 2007, the cost
of fertiliser had climbed 135 per cent in a matter of months.19
That increase, along with rising prices for seed, and continued
instability, led farmers to plant only one third of the crops they
planted last year. Elsewhere in the world, higher prices have
simply meant less farming. ‘Farmers have no access to credit,
so when prices go up, they can’t afford to plant,’ said Ms
Sheeran.
Climate change
In recent years droughts and other extreme weather events
have hit some of the world’s main grain-exporting countries hard,
as noted by the Intergovernmental Panel on Climate Change in
its Fourth Assessment Report late in 2007.20 In particular, poor
harvests in Europe and Australia in 2006 and 2007 have led
to low levels of global stocks, especially of wheat and maize.
In all five of the countries in Latin America and the Caribbean
currently listed as in crisis and requiring external assistance –
Bolivia, Ecuador, Nicaragua, Haiti and the Dominican Republic
– flooding is one of the problems to have hit farmers.21 And in
Central America and the Caribbean, Bangladesh and Burma,
hurricanes and cyclones have destroyed entire harvests in a
single day. Across sub-Saharan Africa, more erratic rainfall has
led to drought and frequent crop failure. Scientists say that the
evidence that the climate is changing is ‘unequivocal’, with
greenhouse gas emissions caused by humans more than 90
per cent likely to be the main cause.22
Biofuels
US demand for ethanol as fuel, which has seen production soar
from 1,300 million gallons in 1997 to an estimated 6,500 million
gallons in 2007,23 has led to the diverting of maize from food to
biofuel throughout the Americas. Today ethanol is blended into
more than 50 per cent of the petrol sold in the US.24 On the
eve of the FAO summit in June, US Secretary of Agriculture Ed
Schafer defended the use of ethanol, saying biofuel production
had only contributed ‘2-3 per cent’ to food price rises.25 In May,
however, John Lipsky, first deputy managing director of the
IMF, said: ‘…biofuel policies in some advanced economies are
spilling over to the price of key food items, particularly corn and
soya bean. IMF estimates suggest that increased demand for
biofuels accounts for 70 per cent of the increase in corn prices,
3 Fighting food shortages Why now?
‘The world’s misery index is rising.’
Josette Sheeran, executive director of the World Food Programme
and 40 per cent of the increase in soya bean prices.’26
America’s growing demand for biofuel is having a
particularly devastating impact on Latin America and the
Caribbean. These two areas have relied heavily in recent years
on imports of maize from the US because of trade liberalisation.
The diversion of traditional crops to biofuel production also
gives rise to aggressive expansion of crops such as sugar and
African oil palm. In some countries this has led to subsistence
food producers being violently evicted from their land.27 Some
biofuels (for example jatropha) may have a role to play as part
of a sustainable, mixed-crop approach, helping to meet local
energy needs and protecting soil quality. However, commercial
biofuel plantations can push small-scale farmers off their land
and monopolise water supplies, squeezing out domestic food
production.
As a means of combating climate change, recent science
suggests that ethanol from maize does not actually produce
very significant carbon savings. Rich countries need to reduce
their use of all carbon-emitting fuels, including biofuels. The
overriding priority for the climate is to make deep and swift cuts
in emissions.
Market trends
Price volatility
From rice to soya beans, prices today are very volatile. The
factors accounting for this include the weak dollar, fluctuating
exchange rates and commodity market speculation linked to
future food prices.
Speculation
Commodity prices have been drifting upwards for the past sixand-
a-half years, a process that has recently accelerated. Hedge
funds moving in on this form of commodity trading recognised
the ‘extraordinary profitability’ of agricultural produce if food
shortages became prevalent.28 Michael Masters, a hedge fund
expert, told a US senate committee in May 2008: ‘You have
asked the question “Are institutional investors contributing to
food and energy price inflation?” And my unequivocal answer
is yes… What we are experiencing is a demand shock coming
from a new participant in the commodities futures market:
institutional investors.’ Masters said these included corporate
and government pension funds, sovereign wealth funds and
university endowments. Assets allocated to commodity index
trading strategies, he said, ‘have risen from $13 billion at the
end of 2003 to $260 billion as of March this year’.29 The prices
of the 25 commodities he included in his survey, including
nine agricultural products such as wheat, corn and soya beans,
as well as cattle and pigs, had risen by an average of 183 per
cent over the five years in question. So popular has this form
of trading become that several banks, including Barclays and
Deutsche Bank, have launched agricultural commodity index
funds. Part of the reason for this is excessive liquidity – too
much money is chasing a limited supply of commodity-based
assets. The result has been an increase in market values, which
has fed directly into price inflation.
Protectionism
Some major food-producing countries have begun to limit
exports during the present crisis to protect their own stocks,
cutting supply and raising prices still further.
Growing demand for meat
There has been increased demand for meat among the
emerging middle classes in some developing countries, largely
fuelled by increased prosperity and a change of eating habits.
Livestock requires feed. Raising cattle also utilises large areas
that could otherwise be used for crop production.
Population and urbanisation
Population growth is partly to blame for the inability of poor
countries to feed themselves. Africa is the worst hit by the
present shortages, with 21 countries at present in crisis and
requiring external assistance.30 The continent’s population
almost doubled between 1975 and 2000 to 794 million, and is
expected to show a similar increase by 2030.31
In Asia, where ten countries are in crisis and need help,32
the population increased by 1.2 billion between 1975 and 2000,
and is expected to do so again by 2030.33
And in Latin America and the Caribbean, where five
countries are in crisis and need outside intervention34, the
population grew by 187 million to 519 million between
1975-2000, and is expected to rise by a further 204 million35 by
2030.
But it isn’t necessarily the countries which have experienced
rapid population growth that are hungry now. China, which
accounts for a significant proportion of Asia’s population
growth, is relatively food-secure.
‘Biofuel policies in some advanced economies are
spilling over to the price of key food items, particularly
corn and soya beans.’
John Lipsky, first deputy managing director of the IMF
4 Fighting food shortages Market