Expensive food in 2007

More expensive food is the mega trend of 2007. There are six billion people on this earth. And it may be safe to say that this year there would be hardly any one who can claim to be unaffected by the rise in price of wheat, rice, corn, pulses, vegetables, milk, meat, eggs and cooking oil.

This mega trend has already led to two tectonic shifts in global agricultural trade in the last few months. One, except for sugar, the days of dumping food on the world market are over. Two, governments of every political hue and religious colour are unapologetically making radical changes in trade policy to keep local food prices within sane limits.

Let’s take dumping first. Dumping is selling a commodity below its cost of production. For several years now the large exporting nations have kept world prices artificially low by hefty subsidies to local farmers. The ways of dumping have been fairly ingenious.

The USA’s food aid, for instance, is the sushi equivalent of a dumping programme wrapped in the cloak of charity. The USA gives more than half of the world’s nearly $4 billion of annual food aid. Yet by law, the US Agency for International Development and other federal agencies can’t simply write cheques to feed the hungry. Instead, they must buy American-grown food from American conglomerates; 75% of it must be shipped on American-flagged vessels. It’s been a sweet deal for domestic businesses and creates a ready market for local farmers.

What’s more, these food shipments are often given to NGOs in poor countries, which sell them to raise money. In the last three years alone, these groups have reportedly sold off $500 million of American food aid.

But high grain prices are rapidly puncturing USA’s enthusiasm for charity. In 2004, USA paid around $363 to buy a tonne of food aid and ship it to the developing world, officials say. This year, delivering that same tonne of aid abroad will cost an estimated $611, an increase of 68%. In fact, food donations to the world’s hungry have fallen to their lowest level since 1973 as surging grain and shipping prices outpace the aid budgets of rich nations.

The virtual disappearance of dumping is great news for farmers across the world who can now expect to receive the real price for their crops from the world market. Unfortunately, the downside is that for the world’s 850 million hungry people, often concentrated in countries ravaged by war and famine, the decline in food aid also means plunging further into hopelessness.

While charity is rapidly going out of fashion, changing rules of the game is certainly in. Just to give you an idea, here is a short list of policy changes around the world in the last one month. Whether they are successsful or not, governments are desperate to be seen as being proactive.

With elections in December, the Russian government intends to limit wheat exports, release stocks to keep domestic wheat prices down, and impose export tariff on barley. Pakistan has banned wheat imports and decided to import 1 million tonnes. Thailand has reduced import duty for chickpeas, beans and pulses from 30% to 5%, and for wheat from 0.10 baht/kg to zero. Indonesia has liberalized rice imports by state-run Bulog. Though the world’s largest export of palm oil, it has imposed a stiff tax on palm oil exports and exempted non-branded cooking oil from VAT to keep local prices affordable. Current cooking oil retail prices are 41% higher than in January 2007.

A strike by bakers to protest high wheat prices in Nigeria has forced the government to sit up. Even in oil-rich Saudi Arabia, the 60% rise in basmati prices has forced the government to clamp down on MRP.

In Tunisia, there is growing alarm that the CGC, a price compensation fund meant to offset part of the cost of staple food and feed imports, may spend over $430 million in the current calendar year, up nearly 70%. CGC outlays are forecast to reach nearly $620 million, an amount equivalent to over 2% of the country’s GDP. Senegal has waived tariffs and value added taxes, imposed price controls and given subsidies to calm consumer anxiety. In drought-plagued Australia, the veto on over bulk wheat exports has been extended until June 2008.

In UK, food inflation increased in September, rising to 2.7% compared with 2.1% in August, the largest month-on-month increase since December 2006. The cost of a full English breakfast is soaring as animal feed is pushing up the cost of eggs, bacon and dairy produce. Wheat has also hit a record high, so toast isn’t the budget option either.

There could be egg shortages in the lead up to Christmas, for the first time since the Second World War. In China, authorities are concerned surging food prices have lifted inflation to levels not seen in a decade and may spill over into wages. And we all know what’s been happening in India on the food trade policy front.

For more than 40 years, international trade negotiations have been dominated by large exporters — the United States , EU, Canada , Argentina , and Australia — wanting greater market access in importing countries. Now the world may be moving into an age dominated not by surpluses but by shortages. So the issue is not exporters’ access to markets but importers’ access to supplies.

Whether it is Ramadan or elections or inflation, food prices are spooking every government. The good news is that trade barriers are rapidly dissolving as more nations buy overseas. The bad news is that governments can no longer be certain the shops would remain open. 2007 has shown that in an integrated world food market, everyone is affected by the same price shifts. That’s no small thing. This market has the power to hurt more people and destabilise more governments than any thing we have seen before.