Higher food prices may be here to stay


A Kashmiri fruit seller arranges fruits inside his shop at a market in Srinagar February 24, 2011. Indian food inflation is among the highest in Asia despite good harvests and food prices have been in double digits for much of the last year. (FAYAZ KABLI/REUTERS)

Agronomist Roger Elmore suspected trouble in July, when Iowa’s cool summer nights didn’t get as cool as usual.

The evening heat, he knew, could mean a smaller corn harvest at a time when global food markets are so tight that anything less than a bumper U.S. yield can send prices higher.

The world now faces a crisis in food prices that has its roots in those warm Iowa evenings. Since last summer, several events — floods in Australia, blistering drought in Russia, the threat of a poor winter wheat crop in China — have compounded concerns about the food supply and pushed world prices to the highest levels measured since the U.N. Food and Agricultural Organization began calculating its index in 1990.

For decades, the world was often swimming in surplus food because farmers were so productive. But rising demand has caught up, and reserves have become so tight that global food markets are vulnerable to even minor shocks. Many analysts say that higher, more volatile prices may be here to stay.

The new dynamic reflects in part the rising demand for meat in developing countries such as China, which has almost single-handedly driven up prices for the soybeans it imports for animal meal, as well as the increasing use of corn for ethanol. Today, at least a third of the U.S. crop goes for making fuel. In addition, there is spreading concern that climate change may make weather less settled and more disruptive to growers.

“For the last 60 years, the simple story was agricultural productivity — great productivity gains, unabated,” said Joseph Glauber, chief economist at the U.S. Department of Agriculture. “But in the last five years, prices have lifted, and you see this real strong demand.”

Since last summer, the market price for corn to be delivered in May nearly doubled from $3.67 to $7.23 as of late last month, according to data compiled by Dan O’Brien, an agricultural economist at Kansas State University.

Grain reserves have dwindled. The latest USDA estimates, released Thursday, show U.S. reserves of corn and soybeans at historic lows, less than 5 percent of projected demand for the coming year. Typical reserves have been three or more times that amount, a chief reason why it does not take much to send prices skyrocketing.

In the past few days, food prices have come off their peaks, although they remain high. Late-winter precipitation in China means its wheat crop will probably turn out better than expected, and U.S. growers are expected to plant millions more acres in response to high prices.

Still, the events of the past few months underscore the changing dynamics.

Three years ago, a rapid run-up in prices also shocked world markets. By many accounts, it was more acutely felt among the world’s most vulnerable because it involved shortages of rice, a key homegrown staple that allows many developing countries to avoid pricier imported grains. Price increases and stockpiling by worried governments prompted months of food-related riots around the world. But the record prices vanished when the world tipped into recession.

Now, the global rice crop is abundant, and many developing countries, stung by a sense of vulnerability in 2007, have spent the intervening years boosting local food production to help buffer them from world prices, said Ngozi Okonjo-Iweala, a managing director at the World Bank.

Still, the recent episode of rising prices “has opened a new chapter on food security . . . the game has changed,” she said. “Even if it gets better for a while, uncertainty has been built into the picture, and I don’t think it is going to go away.”

At first, Iowa looked headed for a great harvest, said Elmore, an agronomist at Iowa State University. But the higher nighttime temperatures meant the corn developed faster and had to be harvested as much as 10 days early. Iowa corn yields dropped from an average of 175 bushels per acre to 165.

Governments around the world are taking notice of the sharp rise in prices, not least because food inflation was among the reasons demonstrators flooded streets in Tunisia, Egypt and elsewhere in the Middle East.

The rising cost of corn has prompted protests in import-dependent Mexico and sparked a battle between the Mexican government and an industry group trying to increase the price of tortillas. Bolivia has said it would tap central bank reserves to boost investment in local farming, and food exporters such as Argentina and Brazil are aiming to grow more crops and sell them at attractive prices. India and Russia have imposed selective export bans, and leaders in both countries have cited food inflation as among their chief domestic problems.

The impact on U.S. consumers has been slight: Basic commodities such as wheat are a small percentage of the cost of the bread and other food in grocery stores. The latest government data show that food prices rose 1.8 percent over the past year.

But that may change. Analysts are watching how rising grain and corn prices will affect the price of meat and whether reserve stocks begin to climb back toward normal levels.

By 2050, the U.N. Food and Agricultural Organization projects that world food production will have to jump by 70 percent. Much of that reflects growth in the world’s population, which is expected to increase to 9 billion people, a 50 percent rise. But food production will need to grow even faster to keep up with the expanding share of the world’s harvest used to feed animals — as more people add animal protein to their diets — and to make fuel.

It is “an untenable situation that we don’t have an answer for,” said Scott Shellady, a trader with XFA Futures in Chicago. “The long term is shaping up to be demand we have a hard time filling.”

That’s the conclusion that Jay Armstrong is reaching on a Kansas farm. As of last week, markets were offering prices of about $5.75 a bushel for corn to be delivered in the fall and $12.80 for soybeans — off the recent highs, but still healthy.

He isn’t ready to sell yet.

“The bottom line is that food prices are going to get higher. We have a world situation where China and India are eating better,” he said. “They want our soybeans, and they want our corn.”

Staff writers Juan Forero in Bogota, Colombia, Will Englund in Moscow, and Simon Denyer in New Delhi and staff researchers Liu Liu in Beijing and Gabriela Martinez in Mexico City contributed to this report.

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