Cautious in the Face of an International Food Crisis

Reduction in global food production will not lead to food crisis or even famine, but will raise international prices, triggering a new round of inflation in grain prices.

Recently, prices of agricultural products at the Chicago Mercantile Exchange have been soaring, along with the prices per bushel of corn and soybeans, which were $8.16 and $17.49, respectively, reaching a new record successively. The price of wheat rose by 50 percent in the last five weeks and exceeds the price in Russia after its export ban in 2010.

The rapid rise in global food prices right now mainly stems from the sharp reduction of output in the United States, Europe, and Russia due to drought, especially in the United States, which is currently facing its worst drought since 1956. For example, nearly two-thirds of the crop planting area of the United States is suffering from drought, and the output of corn and other crops is expected to drop by 8 to 15 percent. Recently, the Russian Ministry of Agriculture cut its total grain output in 2012, once again, to 80 to 85 million tons.

At the same time, the reason why the drought in the United States quickly induced a surge in international grain prices is a lack of freedom in global food trade. The United States is the largest exporter of the world’s corn, soybeans and wheat, and provides corn supplies for half of the world. But the United States also has advantages over other major suppliers in international food trade. First, the United States has an advantage with its exports and its land — due to the planting advantage of a great deal of land for cultivation and a population of few people. Secondly, there is a lack of freedom in global food trade, as nations take a variety of trade protection measures to secure the safety of their own food supply. This makes the international grain price more vulnerable to the impact of the U.S. drought.

However, the view that the whole world may face a new round of food crises seems too pessimistic. We believe that global food crises similar to the ones in 2007 and 2008, that caused a food riot in Bangladesh and 30 other nations, will not happen. First, because the global supply of rice and wheat as well as food stock are better compared to 2008: As long as international food trade flows smoothly, the probability of an international food crisis is low. Secondly, whether it was the global food crisis in 2007 to 2008, or the famine in some countries and regions in the past, the root cause is a lack of freedom in international food trade, and not shocks to the food supply. The Bengal famine of 1947 occurred in a year where there was plenty to harvest. One of the reasons that it degenerated into famine is that the drought at the beginning of that year caused farm workers to be unable to afford food due to unemployment. The other reason is that the drought caused the market to worry about shortage of food supply which, combined with limited government purchases, caused residents to store up grain and lead to market condition where grains had high prices but no market, causing large numbers of people to starve due to the unavailability of food to buy.

Reduction in global food production will not lead to food crisis or even famine, but will raise international prices, triggering a new round of inflation in grain prices. For example, in China: Although current inflation continues to fall, the rise in international food prices, coupled with the recent rebound in international oil prices and severe weather conditions in some regions of China, has caused vegetable prices to rise — priming the food sector once again for domestic inflation. Data from the National Development and Reform Commission shows that present domestic food prices are higher than the international market. For example, the wheat price per ton in June was 547 yuan higher than U.S. wheat (free on board), 896 yuan higher for corn, 957 yuan higher for soybeans, and 1,507 yuan higher for late indica rice. Having current domestic prices higher than international prices is an equilibrium state under the internationalization of the food supply — a rise in international food prices will ultimately affect the trend of domestic grain prices. Also, due to higher import dependence on domestic soybeans, corn, etc., the prices of international soybeans, corn, etc. will eventually have a direct affect upon the price of domestic meat. Therefore, compared to deflation, inflation should attract more attention.

In global terms, countries should abide by the agreement reached by the G20 ministerial meeting on agriculture in June of last year to remove potential food export restrictions and other policies, improve the availability of international grain market information and promote the freedom of the global grain trade. Some of the food trade protections caused by reduction of grain output will conflict with food supply, which may lead to famine in impoverished countries.