Record food prices have been just one ingredient in the unrest in the Arab world. However, they are causing major concern across the globe for the second time in three years. Structural shifts have led to a tightening of the international food-supply system, magnifying the effect of disruptive events such as weather-related crop failures in 2010. With no quick relief in sight, an era of cheap food appears to be over.
Demonstrators waving baguettes on the streets of Tunisia, Jordan and Yemen had already provided an illustration of the problem when the United Nations' food agency declared on 3 February that global food prices were at a new all-time high. The cost of wheat has been climbing since summer 2010, when drought and bushfires laid waste to crops in Russia, Ukraine and Kazakhstan, all leading exporters; the prices of sugar, maize (corn), soybeans and vegetable oils have also been rising.
In January, the UN Food and Agriculture Organisation (FAO) had warned that its food price index had risen past some of the highs that sparked riots in 2008. By the time of its February announcement, there had been a further 3.4% increase, and - although their main focus was on demanding President Hosni Mubarak's departure - protesters were on the streets of the world's top wheat importer, Egypt.
There are many reasons to link the Arab uprisings to food-price inflation. With little arable land and scarce water supplies, the Middle East and North Africa (MENA) region imports more food per capita than any other, accounting for 25-50% of national consumption. By tonnage it is the world's largest cereal-importing area, and it is a major customer for Russian grain. Huge population growth and changing diets have contributed to the region's growing food insecurity.
Yet experts in Tunisia and Egypt - as well as World Bank President Robert Zoellick - have described food prices as an 'aggravating factor' in the recent turmoil, rather than the principal cause. 'This is not only a bread riot,' insists Dr Omneia Helmy, deputy director of research at the Egyptian Center for Economic Studies in Cairo, where popular demonstrations ousted the Mubarak regime on 11 February. 'In Egypt, the 2008 food-price crisis never went away. If it was only about that, this revolution would have happened sooner.'
Rioting in Algeria in early January was a direct response to widespread unemployment and higher prices for sugar, milk and bread. The government's move to reduce the cost of staple foods only quelled the violence temporarily, and there were further demonstrations in February. In inflation-hit Tunisia, protesters waved baguettes symbolically, but also chanted they could endure poverty as long as they were rid of President Zine El Abidine Ben Ali and his ruling RCD party. He fled the country on 14 January.
In Egypt, families spend an average 40% of their income on food, overall food-price inflation has been at 20%, and the price of some individual commodities, such as tomatoes, has shot up tenfold. Dr Helmy says that about 40 million (of 83m) Egyptians rely on ration cards and that the bread-subsidy system is riddled with corruption. Yet still she insists: 'This is about justice, democracy, equality, political freedom.'
'Most of these countries are very sensitive to food issues and make them a priority,' says FAO senior economist Abdolreza Abbassian. 'If you look at the people who have been at the forefront, many students and middle-class, they are not starving. To say that food is pushing them onto the streets is overstating the case.'
Bad year for farmers
But if food prices were merely one factor in the wider revolt in the Middle East, spiralling wheat and other commodity prices are creating a global headache. In February 2011, wheat was trading at $8.50-9 a bushel, compared to around $4 in July 2010. The surge in prices was a surprise: in its January 2010 World Agricultural Supply and Demand Estimates (WASDE) report the United States Department of Agriculture (USDA) had predicted higher global wheat production and lower prices. The International Grains Council (IGC) was similarly optimistic about supply. But in August 2010, estimates began to be adjusted downwards as adverse weather wiped out crops.
The stage was set when record spring rainfall in Canada, the world's second-largest wheat exporter after the US, cut that country's harvest by nearly a quarter. Then drought beset Russia, Ukraine and Kazakhstan. Bushfires across Russia slashed the yearly wheat harvest to approximately 60m tonnes, down from 97m tonnes in 2009. Russia, the world's fourth-largest wheat exporter accounting for roughly 14% of the global wheat trade, responded by imposing an export ban on wheat, barley and rye from August.
According to IGC figures, Russia's largest customer, Egypt, received only 1.6m tonnes from Moscow in the last six months of 2010, compared to 2.8m tonnes in the same 2009 period. Ukraine, another major supplier, stopped overseas grain sales, and has not restarted them since.
Forecasts were also reduced elsewhere. Drought and dust storms that began in spring 2010 in western China lasted into 2011, threatening nearly 7m hectares of winter wheat and other crops. The US began to suffer similar 'winter kill' from storms in late January.
Southern-hemisphere harvests were hit by the La Niña weather phenomenon, with drought in Argentina starting to affect soybean and maize crops; while torrential rains reduced up to half of Australia's 2010/11 wheat crop to animal-feed quality. Overall, the USDA forecasts that 2010/11 wheat production, at 645m tonnes, will fall below consumption, at 655m tonnes, forcing the world to dip into existing 177m tonne inventories.
Meanwhile, sugar prices hit a 30-year high as Cyclone Yasi raged across northeastern Australia in February. Following poor weather in other top-growing regions Brazil and Pakistan, the cyclone helped push sugar to 33 cents per pound, compared to 17 cents seven months previously.
Industry veterans say they have seen bad production years before, but 2010/11's supply shocks have exposed an increasingly fragile food chain undergoing structural shifts, with not much slack left in the system. On the demand side, a fast-growing world population and rising living standards in developing countries such as China, India and Brazil have placed greater strain on the system. More people in those countries can now afford to eat meat: as raising livestock is feed- and land-intensive, this 'nutrition transition' diverts grains from human consumption and forces up prices. Another significant demand-side pressure has been the increasing use - generally government-subsidised - of sugar, corn and oilseed crops to produce biofuels.
On the supply side, growth in agricultural productivity has been in steady decline since the mid-1990s, when the Green Revolution fuelled by technological advances in farm machinery, chemicals and irrigation petered out. Since then, the increasing scarcity of land and water has been adding to supply-side stresses. Unfavourable weather presents a continual risk, and the impact of longer-term climate change is still unknown.
The steady rise in oil prices has two consequences. By increasing transport costs and farmers' expenditure on nitrogen-based fertiliser, it directly raises crop prices. It also contributes to a greater demand for biofuels. During the 2008 food-price spike, much debate focused on the magnitude of the role played by production of biofuels. In 2010/11, widely divergent claims about biofuels - that they were only responsible for 2-3% of the rise in food prices, or that they were responsible for more than half of it - seem to have faded somewhat. The US-based International Food Policy Research Institute estimates that they account for about one-third of the rise.
However, there is a continuing debate about the extent to which financial speculation in commodities pushes up prices. Institutional and retail money invested in commodities has mushroomed; compared to only $6 billion a decade ago, Barclays Capital recently calculated that some $320bn is now ploughed into commodities, with soft commodities such as wheat, sugar and corn popular targets. French President Nicolas Sarkozy is among those wanting regulation to rein in commodity speculation. But while some research has shown that speculators can amplify existing food-price cycles, and that longer-term commodity investors may have pushed prices upwards, there appears to be no concrete evidence that speculation has a systematic influence. An OECD study last year showed that the prices of soft commodities traded on exchanges were no more volatile than those that were not.
The fall in the dollar - partly triggered by repeated injections of liquidity into the monetary system by the US Federal Reserve - has had an effect, because commodity prices are generally quoted in dollars. For exporters, a sharply weaker dollar can lower revenue when sale proceeds are converted into the local currency, providing an incentive to stockpile and reduce supply. Conversely, a lower dollar reduces the costs for importing countries, sharpening demand.
However, some economists argue that recent dollar falls have not been sufficiently steep to account for the recent commodity price hike. 'If quantitative easing [by the Federal Reserve] was responsible for all of this, we would have dramatic inflationary pressures in the US across the board. We don't,' contends Vincent Truglia of US-based Granite Springs Asset Management.
The FAO's Abbassian agrees that while financial speculation and a weaker dollar may compound the problem, they are not the root cause. 'I know that "many factors" is not an eye-catching answer to the question,' he says. 'However, it is the most accurate.'
New period of 'agflation'
Comparing 2011's price shock to that of 2008, there are several reassuring differences. Stocks of wheat are not as low as in 2008: with around 177m tonnes in storage according to USDA estimates, the stocks-to-use ratio is around 27%, just under a ten-year average of 27.5% and well above 2008's 20%. Moreover, the rise in commodity prices has not been universal. For example, regions such as sub-Saharan Africa have enjoyed good harvests and have not suffered food-price inflation. And the cost of rice - the staple diet of 2bn people around the world - has risen only moderately.
However, worrying uncertainties abound. Bumper crops are needed in the coming year to compensate for last year's shortfalls, but crop-progress reports have been mixed. Supply may even run behind demand for a second year. As early as November 2010, the USDA was saying that 'global wheat and coarse grain stocks are ... forecast to drop significantly, wiping out nearly all the stocks build-up of the past several years'. Many analysts predict wheat prices will keep rising until the end of 2011, and there are fears that drought-stricken China may need to buy more wheat on the world market.
There are knock-on effects for other soft commodities. The price of maize has risen 73% since June 2010, not only because maize harvests have faltered but also because buyers have switched from wheat. While large quantities of low-quality Australian wheat on the market as a substitute livestock feed could now help lower maize prices in Europe, the loss of 16% of Mexico's maize crop in February is a contrary factor. Meanwhile, corn (and sugar) inventories are extremely low.
A well-functioning, rules-based trading system is crucial to maintaining food supply, and governments saw three years ago how export bans, protectionism, panic-buying and hoarding could badly disrupt it. However, this may not prevent a repeat. Egypt's purchase of 2.9m tonnes of US wheat from 1 June hints at some stockpiling. Crops office FranceAgriMer said Algeria bought 2.95m tonnes between mid-December and mid-January, which was 'probably' a record. Jordan, Lebanon, Libya, Morocco and Turkey have made big purchases recently.
In the complex mix of environmental, political, economic and trade factors influencing global food security, analysts seem sure of one thing: the world is entering a period of 'agflation'. In the past ten years, according to the FAO, global food prices have risen an average 83%. 'Another multi-year surge in food prices is likely,' says a recent report from Japanese investment bank Nomura.
Key drivers of higher food prices, such as population increase and the nutrition transition, are unlikely to abate. The US, EU and Brazil are unlikely to change their biofuels policies. So bodies like the World Bank's Global Food Crisis Response Programme and the UN Secretary General's High-Level Task Force on the Global Food Security Crisis argue that there needs to be major investment in agriculture. These investments will need to take into account the probable effects of future climate change.
With the poorest countries the most vulnerable, the World Bank is concerned about possible unrest in Central America and the Caribbean, particularly El Salvador, Haiti, Grenada and Jamaica. The FAO's Abbassian thinks the Central Asian countries of Kyrgyzstan and Tajikistan are in a precarious position, as well as African states such as Uganda, Mali, Niger and Mozambique (which had food riots in September 2010). Nomura's Food Vulnerability Index puts Asian countries such as Bangladesh and Sri Lanka at the top of its list, alongside MENA countries already affected.
Until more is known about the 2011/12 harvest, Granite Springs' Truglia says the global food industry is in a wait-and-see position, 'at the mercy of the weather'. The FAO's Abbassian admits: 'We are two bad seasons from a major disaster.'