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August 13, 2012

Another Crisis by Rising Food Prices?

By Economy Watch

As we mark the fifth-year of the global financial crisis today, experts from the United Nation’s food agency have warned that soaring world food prices could lead to a repeat of the 2007/08 food crisis which hurt some of the world’s poorest communities.

According to the Food and Agriculture Organisation of the United Nations, global food prices surged 6 percent in the month of July after three months of decline.

The Rome-based organisation took the surprise step of publishing the index this month - which it usually does not - due to the exceptional market conditions affected by unusual weather patterns.

The global alarm over a potential food crisis escalated on the back of untimely rains in Brazil, droughts in the United States – the worst in over five decades –and production difficulties in Russia.

Delayed monsoons in India and poor rains in Australia also contributed to higher prices.

Commenting on the spike food inflation, Concepcion Calpe, a senior economic at the UN organisation said:
The market is looking ahead and is very much aware of the problems all over the world.  The next few months, we will have a lot of volatility. 
The surge in prices has renewed fears of a food crisis that plagued countries in 2007/08, affecting some of the world’s poorest communities. Rising food prices were also partly citied for sparking unrest that led to the downfall of leaders in Tunisia, Egypt and Libya.

Most governments have so far refrained from trade intervention to control domestic food prices, though Russia’s Deputy Prime Minister Arkady Dvorkovich said he will not rule out protective export tariffs at the end of 2012 if the food crunch does not improve.

The price surge is also reviving a debate over the role of financial speculators in commodity markets, said Reuters. Big banks and institutional investors were largely blamed for driving up prices in 2008, although academic and government studies have offered conflicting views over the true cause of food inflation.

However, the UN warned that the United States must take “biofuel action” to prevent a food crisis.

As the surge in corn prices revives a fierce food versus fuel debate, José Grazian da Silva, the director-general of the UN's Food and Agricultural Organization, wrote in the Financial Times a high-profile yet indirect message to Washington:
US maize production had been expected to increase to record levels this year. That view will prove optimistic. Much of the reduced crop will be claimed by biofuel production in line with US federal mandates, leaving even less for food and feed markets. The August US Department of Agriculture estimates, announced today, will give a more precise idea for just how much the maize crop is reduced. Few people are expecting good news. 
Under the five-year-old Renewable Fuels Standard (RSF), US fuel companies are required to ensure that 9 percent of their gasoline pools are made up of ethanol this year, which means converting some 40 percent of the corn crop into the biofuel.

Courtesy Economy Watch(EconMatters author archive here

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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