Emerging Market Food Crisis

dailyreckoning.co.uk
Rob Mackrill
Mon 31 Mar, 2008

Rice prices shot up 30% last week as Egypt, Vietnam and Cambodia restricted exports

Dear Subscriber,

In the financial sector, banks don’t want to lend to each other.

Now in the commodities sector, increasingly, countries don’t want to sell food to one another.

If countries adopt a “starve your neighbour policy” warns Joachim von Braun, director general of the International Food Policy Research Institute, less food will be traded internationally and prices are going to be volatile reports Reuters. For volatile we would read higher, thereby pumping up inflation in the process.

Recently, agricultural breadbasket Argentina has imposed a grain tax on its farmers which has disrupted exports. Egypt introduced a ban on rice exports last Thursday as tensions mount in their subsidised bread queues at home. Cambodia introduced a ban the day before. The next day both India and Vietnam, major rice exporters, announced further export curbs reports Reuters.

Thailand , the world’s largest rice exporter, is mulling the idea of restricting exports leaving only China yet to resist any such measure though it has raised the minimum price it guarantees its farmers so stoking a rising price. All told, these developments have removed about a third of the rice from international markets and prompted the price to skyrocket 30% to an all time high. Prices for some types of Thai and Vietnamese rice have doubled this year alone.

This is something of a sea change from the market reported by the BBC less than six short years ago. Then, the five nations that accounted for three-quarters of the world’s rice exports – China, India, Vietnam, Pakistan and Thailand – met to set up an OPEC-style cartel for the rice business to protect them from falling prices. At that time, the UN Food and Agriculture Organisation painted a bleak future for producers forecasting a 10% increase in production and a 2% decrease in consumption by 2010.

Scroll forward back to today and the pervasive fear is one of rice scarcity and a growing unease amongst food importing countries with increasingly restless populations. Mexico, Morocco, Senegal, Guinea, Yemen and Uzbekistan have all seen food riots reports the IHT. More look likely. Indonesia warned of potential unrest back in February.

And countries, such as the Philippines - the world’s largest rice importer – look vulnerable. It is struggling already to secure sufficient rice supply for the 8 out of 10 of its population that consume it for breakfast, lunch and dinner. Last week, restaurants cut their rice portions to customers and President Gloria Macapagal Arroyo signaled official concern when she ordered a crackdown on suspected hoarders. Meantime John Bruton, the EU’s Ambassador to the US, is warning the world to brace itself for 10-15 years of rising food prices with the world’s poorest, as with all things, the most vulnerable.

How this commodity has gone from abundance to shortage in just a few years is once again a story supply and demand. On the supply side a run of poor weather, crop viruses, reduced cultivation, industrialisation, and a running down of stocks – costly to maintain have all taken their toll. But rice is just one example of a story that plays throughout the agricultural commodities sector from wheat to soybean to palm oil.

And the emerging elephant tipping the scales on the demand side is led, of course, by China. The same central logic that applies to industrial commodities is showing up again in agricultural commodities. The sheer weight of its 1.3bn a fifth of humanity - hurtling from ox-ploughing agrarian subsistence to 21 st century bullet-trained industrialised economy comes with consequences. A ramping of new demand.

Last year the Central Bank of Australia sat down to consider whether this new demand could be the big one.... A really big bull run for agricultural commodities.

There’s a fair degree of scepticism because agricultural prices remained pretty flat during the industrialisation of America. But then the scale of a China industrialising is much greater. Diets are improving as China’s emerging middle class aspire to better food. That means more meat.

And more meat needs more food to feed more animals. In 1985, meat consumption averaged 44lbs per capita a year. Today it is 110lbs with each 1lb of beef needing 7lbs of grain to produce.
The emerging markets may have escaped the financial crisis. The emerging food crisis looks to be just getting going.

Regards,
Rob Mackrill

The Daily Reckoning