It crept back

MULUALEM TEGEGN bought a donkey last year. As a hard-working Ethiopian farmer, aged 58, he saw the purchase of the beast as a return to better times after several seasons in which drought and high prices had forced him to sell his livestock and take his grandchildren out of school to work on the farm. This year, he will have enough grain left to buy a goat or two, and the donkey will help the children make the long trek again to school. This is how things are supposed to be.

World food prices soared in 2007-08, pushing hundreds of millions into poverty. But—said people at the time—there was a silver lining: high prices would be good for farmers, especially smallholders in poor countries such as Mr Tegegn. Higher returns would suck money into farming, leading to higher yields, bigger harvests and stable or falling food prices. Eventually, the argument ran, farmers and consumers would all be better off.

This happy state of affairs seemed to be coming to pass in the second half of 2008. Ethiopia reported a record cereals harvest this January, up 10% on the previous year. Across the world, the picture was similar. After the price spike in the first half of 2008, farmers harvested 2.3 billion tonnes of cereals in 2008/09, the biggest crop ever seen. Big exporters began lifting the trade bans they had imposed to keep local prices from rising, so more food became available to world markets. The sharp fall in the price of oil, which occurred at the same time, increased food supplies further because, by making oil cheaper than ethanol, it encouraged farmers to sell for feed the maize they would otherwise have turned into biofuels. As food supplies surged (and demand, hit by the global recession, stagnated), prices plummeted. Between its peak in July and a trough in December 2008, The Economist’s index of food prices fell by 40%.

All that seems fairly rational and hopeful. But this year’s changes have been more puzzling. Between December and mid-June, the food index rebounded by a third, even though this year’s total cereals crop is expected to be another bumper (2.2 billion tonnes, says the Food and Agriculture Organisation, second only to 2008/09, see chart left). Meanwhile, soyabean and sugar prices have risen by nearly half from trough to peak—see chart below—and the index of “non-food agriculturals” (plants such as cotton or rubber) also rose by a quarter between December and mid-June. Prices have been increasing at a time of plenty.

It’s not meant to go this way

If this was happening during a boom, it might be understandable. But recession would normally dampen down price rises. So what explains the return of food-price inflation? And does it mean that the so-called world food crisis is returning?

Read more . . .

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Tags: biofuels, cereals, drought, ethanol, food supplies, global recession, harvests, Innovation, price of oil, world food prices, world markets

This entry was posted on Friday, July 3rd, 2009 at 8:49 pm and is filed under Economist, Innovation Needed, The Food Challenge, food. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.