Global Crisis in Food

Global food prices have witnessed an unprecedented surge in recent months. The increase in prices, which initially started with corn and wheat, has now engulfed all cereals, and vegetable oils, meat, milk and most fruits and vegetables. The food price index (base 2005=100) of the International Monetary Fund, which covers a large number of food items, reached 170 in March 2008; the highest value of the index in the past quarter century was 143 in November 1980. Food price inflation started building up around August 2005, it reached the double-digit level in mid-2006, crossed 20 per cent in September 2007 and accelerated to 43 per cent in March 2008. The rise in prices has been much higher for staple foods. Wheat, rice and maize prices in international markets in the first quarter of year 2008 were 107 per cent, 71 per cent and 29 per cent higher, respectively, as compared to the previous year, and this came on top of substantial jumps in 2007.

It seems that both the market fundamentals caused by shifts in demand and supply as well as speculative trade are jacking up food prices. The major factor on the supply side is the increase in the price of crude oil and other forms of energy that have an impact on the cost of agricultural production. Most of the farm operations are now mechanised and the increase in the price of oil naturally enhances total costs. Energy prices are also a significant factor in the price of fertilisers. Urea prices in the international market were around 50 per cent higher in 2007. While these two factors and the rise in transportation charges have raised the cost of farm production, other events have directly led to food shortages. The diversion of maize and vegetable oils for ethanol and biodiesel production, the severe drought in Australia (a major global grain producer) in 2006 and 2007 and adverse weather in east Europe led to a significant reduction in grain production. The amount of corn used for ethanol in just the United States is around 5 per cent of global production and is equivalent to 40 per cent of global trade in cereals. The use of one food crop as feedstock for biofuel has a spillover effect on others.