World Food Crisis: Causes And Effects

World food prices had a dramatic increase throughout 2007, and the first and second quarter of 2008, creating global problems mainly that of political and economic instability and social unrest in poor and developing nations. Major unrest and government actions were taken in countries like Bangladesh, India, Pakistan, Ethopia, Indonesia, Myanmar, Egypt, Cameroon etc. These can be categorized as the developing or the less developed nations of the World.

Systemic and well determined causes of the World Food Crisis continue to be a matter of debate, however, there are many areas of concern that had been focused on and identified as the causes of this Crisis. The primary cause of increased prices was claimed to be an increase in demand for more resource intensive food, namely processed food by the world’s fast growing population. As stated by the Head of International Food Policy Research Institute in 2008, that ‘the gradual change in diet among the newly prosperous population is the most important factor underpinning the rise of the Global Food crisis’.

Modernization of population in Asia majorly, led to a vast majority of the population now growing into becoming the ‘middle-class’. Taking into account the populations of India and China, we can clearly witness this change. In 1990, the middle class grew by 8.6% in China and 9.7% in India, however in 2007 the growth rate was 70% and 30% respectively. Hence, the corresponding increase in the middle class led to them adopting a different lifestyle and different eating habits where they demanded for more variety, eventually leading to a competition with the western countries and pressurizing the agricultural resources present. This increase of demand exacerbated increase in commodity prices such as Oil.

A developed relation in the agricultural sector is that off petroleum prices and food prices, both being highly correlated to one another with an estimated Correlation co efficient of more than 0.6. This is mainly due to that fact that fertilizers tend to be a ‘necessity’ in our modern-day agriculture, and fertilizers largely require petroleum or natural gas in order to be manufactured. Hence, due to the oil price hike starting in 2007 the prices of fertilizers dramatically increased, reaching their maximum peak in summer 2008 where the prices of ammonia, urea, potash and phosphate approximately tripled. In addition to this the transportation cost also doubled over a two year period, leading to difficulty in the supply chain of food products.

However, the sole input related cause should not be pointed towards the increase in the prices of fertilizers only. Other environmental factors which may be a direct input for agriculture are the atmospheric composition and soil productivity. Plants are highly sensitive to ozone, and lower yields of crops such as wheat and soybean in 2007 may have been due to elevated ozone levels. Large amounts of cultivable lands are also being lost at an extremely fast pace mainly due to water depletion, soil erosion and urbanization. According to a famous theorist Sundquist, “60,000km2/year of land becomes degraded that it loses its productive capacity and becomes wasteland”. Water depletion has also led to the formation of non-renewable aquifers which have negative impact on crop yield, and urbanization leads to annual cropland reduction, all collectively leading to low productivity, low crop yield, high demand and eventually higher food prices which is explained to be the phenomena behind the 2007-2008 world food crisis.

In contrast, as stated by the ‘FAO-Agricultural Outlook Report 2010’, one of the most important reasons for spiked Global food prices was the production and usage of Biofuels. A ‘Biofuel’ is a kind of fuel whose energy is derived from biological Carbon fixation, about 100 million tons of grain are being converted from food to fuel on yearly basis. The primary impact of biofuels on inflation of food is that it increases the price of farm commodities that contribute in producing our food supply ie. corn, soybean, maize, barley etc. The livestock, poultry and dairy industries are the largest soybean and corn consumers. For example, when corn prices rose in winter 2007, broiler and egg producers reduced their production as a result of this chicken and egg prices rose in the market for the consumers. The number of cattle going to feedlots was also reduced in the beef industry resulting in less beef supply per person throughout 2007. For hog producers, profit margins greatly reduced due to higher feed prices leading to a rise in milk prices due to an increased dairy demand worldwide. Eventually adopting a conclusion of The World Bank policy research working paper released in July 2008, that “large increases in biofuels production in the United States and Europe are the main reason behind the steep rise in global food prices”.

It has been an understood fact published in the World Banks 2009 paper that biofuels had raised prices about 70 to 80%. However, they were solely not responsible for this as increased petroleum prices and decreasing dollar rate was the main combination of high prices in 2007-2008. In 1970s the farmers share of consumers good was 32-35%, however in 2007 the retail dollar food share dropped down to 20% only. A rebuttal/contradictory report to this was published by the Renewable Fuel Association (RFA) which criticized the World Bank analysis to be highly subjective quoting: “the author estimates the effect of global food prices from the weak dollar and the direct and indirect effect of high petroleum prices and attributes everything else to biofuel”. Instead RFA highlighted that agricultural subsidies and trade agreements play a far more important role in price hikes, categorizing biofuels only as a minor cause.

The world food economy in recent years has developed to be global in nature hence, being directly affected by agricultural trade policies and subsidies. Theorists such as Martin Khor, have pointed out that developing countries have developed into establishing net food importing economies rather than food independent economies since the 1970s and 1980s. Two non-democratic authorities promoting net food importing economies are mainly the International Monetary Fund (IMF) and the World Bank (WB), which are directives to debtor nations hence causing an increase in food prices. As an example, the production of corn, soybean and wheat production has declined in the USA since the 1970s, which led to import increasing from 10% to 25% in the early 1980s. However, a vice versa scenario also occurs in the case of opening developing countries where Western nations subsidize food imports, but the negative side to this maybe that developing nations may have to depend on imported food if local agricultural does not work out eventually leading to higher food prices.

Agricultural subsidies also tend be a cause for the distortion of food prices in developed countries. Support to farmers in OECD countries sums up to 280 billion USD annually, and farm support depresses global food prices. Despite having benefits with respect to the farmers, agricultural subsidies have drawbacks which are under development in rural areas of developing countries. In addition to this, subsidized food increases consumption rapidly in developed countries. Eventually over consumption being an important factor to food price rises in 2007-2008.

Summing up the casual side of the global food crisis, one last cause would be financial speculation in the international food market. In 2007 financial speculators that expected a large rate of return of food products removed trillions of dollars from mortgage bonds and equities, and invested them into food and resources. This led to a violation of the fundamental financial rule which states that prices only rise when demand increases or supply decreases, however not being applicable to the food industry as in 2008 farmers continued to produce the exact same amount however this was exported instead of being used locally as a result of future speculation. This destroyed the global market self-stabilizing mechanism creating a gap between the local and international markets eventually leading to inflation, eroding investment in food resources and an increase in food prices from 2007-2008.

Moving onto the effects of the global food crisis debate we can categorize them to be short run and long run in nature. Developing countries experienced a negative short run effect due to the soaring food prices of 2007-2008. These countries largely depended on imports for their food security and majority of households in these areas were net food buyers. Hence, increased food prices resulted in riots in a number of countries, including Egypt, Haiti, Mexico, Morocco, Cameroon, Uzbekistan and Yemen eventually contributing to political instability. And as for a fact we know that a country experiencing political instability would tend to have developmental issues preventing it from prospering forward.

Not only did the developing countries witness political instability but they were also put under the pressure of dealing with higher food and energy import prices which placed a heavy burden on the Low-Income Food-Deficit Countries (LFDCs), especially leading to them having to deal with the existing problem of under-nourishment. This particularly hard hit the African countries, effecting the total food imports of Low-Income Food-Deficit Countries to cost 24% higher in 2007 in comparison to 2006, now rising to $107 Billion.

We can support this argument by looking into the risk analysis conducted by the World Food Program (WFP) in numerous countries which suggests that in 2007 the impact on household security was significant. The analysis states that ‘high food prices will make fight against hunger and poverty an uphill struggle in rural areas if no additional actions are taken to mitigate the impact’. Simulations from FAO indicate that 10% increase in food prices leads to 1.2% income loss for the poor households in rural areas. According to this analysis only the richest rural population gains from an increase in food prices.

The rich rural population could be considered to be the farmers in local markets namely, the producers of food. Farmers in the developing countries tend to benefit if global prices move upwards. The Overseas Development Institute claims that according to experience farmers lack the resources mainly being credit and inputs needed to respond in the short term. However, in the long term, they could benefit and this is seen in many African countries in the past and the Green Revolution of Asia. Another effect linked to the producers of developing countries is that as food prices rose in 2007 they became close to the world food prices, hence in developing countries i.e Pakistan, India many commodities were imported and the developing producer became non-competitive and as a result was taken over by foreigners.

Hence, I believe that the effects of a rise in the global food prices could be positive to some and negative to the others. Summing them up, commercial producers and the people they employ would benefit directly from higher prices. Livestock producers on the other hand, are compressed by fulfilling energy costs, higher feed costs and non-beneficial and flat prices. For farm households producing for self-consumption or local markets the increase of prices would have impacts which will be mitigated. However, in contrast to this beneficiaries are the urban poor and major food importing countries that have extreme negative impacts of high food prices as a higher share is now spent on food from their limited income. The unfortunate aspect to this all is that, these people make up a high percentage in our society and their requirements and daily fulfillments are ignored only because of the self-interest of a few higher institutions.

The Global food prices debate is summed up by the policies followed in 2007-2008, and the policies that should be followed in the future to prevent such a crisis from occurring again. In the short term, humanitarian aid is required. Taking into account the situation of 2007 where people were suffering from extreme hunger in developing countries, aid in the form of cash or vouchers became extremely essential for survival. However, in the medium term, the actual need is to improve the purchasing power of the food consumers so they can maintain a suitable lifestyle and buy food even at higher prices. In reality, this requires development in poor countries to foster growth and wellbeing. Other mid-term solutions could also include agricultural investment in fields of research, extension and education which may be helpful in stimulating economic activity. Investment should not only be focused towards agriculture but should also have an environmental focus which is improving the macroeconomic policies, infrastructure, technology, health, basic governance etc. Concluding, a more well designed and tailored approach is required in order for developing countries to build and expand beyond agriculture.

However, in the long term we should look at the environment in a more holistic manner identifying the overall cause and solution of the global food crisis and global markets eventually eliminating that cause from its very roots in order to have harmony for the generations to come.