Global demand lifts grain prices, gobbles supplies

Soaring energy costs may be roiling the financial markets, but world governments are also being rattled by a more basic form of inflation: sky-high food prices.

Pakistan is stockpiling wheat and using its military to guard flour mills. Indonesian consumers have taken to the streets to protest rising soy prices. Malaysia no longer lets people take sugar, flour or cooking oil out of the country. North Dakota, the top U.S. wheat-producing state, may import from Canada due to tight supplies.

The world is facing the most destabilizing bout of food inflation since the "Great Grain Robbery" of the early 1970s when the former Soviet Union bought massive quantities of U.S. grain, sending prices soaring. That episode helped fuel a Farm Belt boom — and later bust — as soaring exports soured and record agricultural land prices fell.

Soaring demand, rising oil prices and government-mandated biofuel use have sent many commodity prices to their highest levels in history. The impact is hardest in the developing world: The United Nations says increasing prices will make it tougher to meet international goals of reduced hunger. Rising prices are squeezing food aid budgets that were already falling far behind growing need caused by war and increasing weather disasters. Worse, soaring costs are adding to political instability in countries such as Afghanistan, where flour prices are up more than 60% in the past year, and as much as 80% in some areas.

The bulls may not be running on Wall Street, but they're charging in the commodities pits. Prices for some varieties of wheat are at an all-time high of more than $16 a bushel on the Minneapolis Grain Exchange. Soybean futures prices have jumped to $13.26 a bushel in Chicago trading, from less than $7.50 a bushel in 2007. Corn, which has averaged about $2.50 per bushel in recent years, is above $5 today. Rice prices have hit records. Palm oil prices, in demand for biofuels production, have risen. The U.N. Food and Agriculture Organization food price index jumped nearly 40% in 2007, following a 9% increase the previous year.

The driving force behind higher food prices: More people in developing countries are earning more money and living better. And the first step to a better standard of living is a better diet. It's a phenomenon called Engel's law, named after the 19th-century German economist, Ernst Engel. Engel's law says that as incomes increase, people spend a smaller percentage of their incomes on food — but they also switch from cheaper to more expensive food.

Grains make up around 60% of the diet in low-income Asian nations, North Africa and the former Soviet republics. Vegetable oil is about 12% of the diet in Sub-Saharan Africa and about 10% in some Asian and Latin American countries, according to the U.S. Agriculture Department. The vegetable oil share of diets is growing as more processed foods are available in low-income countries.

People in developing countries are also starting to eat more meat, and that drives up demand for grains. It takes about eight times as much corn to produce the same number of calories from meat as from bread, says Homi Kharas, senior fellow at the Brookings Institution.

Surging demand for food and feed has tightened grain stocks. The U.S. Agriculture Department, for example, pegs U.S. wheat stockpiles at the lowest level since shortly after World War II. Farmers are reporting tight supplies of seeds for planting.

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