Higher food prices may be here to stay

Customers shop at a market in Hefei in Anhui province, China. The nation is driving up soybean prices.
Customers shop at a market in Hefei in Anhui province, China. The nation is driving up soybean prices. (Reuters)
By Howard Schneider
Tuesday, March 15, 2011; 10:21 AM

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.

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