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Food crisis

What is causing food prices to soar and what can be done about it?

Around the world, the food system is in crisis. Prices have rocketed; they are now higher in real terms than at any time since 1984. They could rise further still if drought lays waste to China’s wheat harvest, as is feared. Food has played some role (how large is hard to tell) in the uprisings in the Middle East. High prices are adding millions to the number who go to bed hungry each night. This is the second price spike in less than four years. Companies are sounding the alarm and the G20 grouping of the world’s largest economies has put “food security” top of its 2011 to-do list.

This attention is welcome. But today’s spike is only part of a broader set of worries. As countries focus on food, they need to distinguish between three classes of problem: structural, temporary and irrelevant. Unfortunately, policymakers have so far paid too much attention to the last of these and not enough to the first.

Idle speculation

The main reasons for high prices are temporary: drought in Russia and Argentina; floods in Canada and Pakistan; export bans by countries determined to maintain their own supplies, whatever the cost to others; panic buying by importers spooked into restocking their grain reserves. Influences outside agriculture make matters worse: a weaker dollar makes restocking cheaper in local currencies; and dearer oil pushes up the cost of inputs (it takes vast amounts of energy to make nitrogen fertiliser, so fertiliser prices track oil prices).

Some people mistakenly blame yet another factor: speculation. True, increased financial trading might make prices more volatile, though the evidence is weak. But trading cannot drive prices up in the long term since for every buy, there is a sell. That has not stopped Nicolas Sarkozy, the current head of the G20, from trying to persuade the world’s premier economic club to crack down on evil speculators.

At the moment big structural shifts, such as the growth of China and India, are influencing prices less than one might think. The two Asian giants are demanding more food (and more types of food), but so far their own farmers have largely satisfied that, so they have not needed to trade much (though that would change dramatically if China were to import wheat this year)…….

The Economist: Read more

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