Saturday, April 05, 2008

storm warning

The world could be one crop failure away from an actual food crisis. Market panic has already started.

By George Wehrfritz and Jason Overdorf
(Newsweek, April 5, 2008)

When all goes well, thunderheads tower above India's southwestern state of Kerala in early June, drenching the region's vital rice fields and ensuring a bountiful harvest. From there the summer monsoon plods northward to soak the baking plains and irrigate vital breadbasket regions that feed 1.1 billion people before arriving at the foot of the Himalayas in August. Forecasting this complex meteorological process has always been an obsession within India, but this year the world will be watching. Changes in the monsoon cycle can shrink India's total grain harvest by up to 20 percent, creating a shortfall of 30 million metric tons. During India's last crop failure, in 2002, the country had a massive reserve to fall back on. "Now," says Usha Tuteja, an agricultural economist at Delhi University, "we don't have enough buffer stocks to make up for one bad year."

India isn't the only danger zone today. A major storm battering the Philippines or Bangladesh at the wrong moment, a pest or plant-disease outbreak in Vietnam, or floods along China's Yangtze River like those that occurred in the mid-1990s would put serious strains on global grain reserves already depleted to levels not seen since the 1970s. Global markets are behaving as if a food shock is imminent.

In recent months the commodity prices of rice, wheat and corn has jumped 50 percent or more, pushing retail prices to levels unseen in a generation and prompting grain-exporting countries to curtail trade to suppress domestic inflation. On March 20, the World Food Program issued an emergency appeal for more funding to keep aid moving to the world's poorest countries. Last week World Bank president Robert Zoellick called for urgent global action on the part of rich nations "or many more people will suffer or starve."

Experts blame a variety of factors for today's food crunch. Poor harvests in Europe since 2005 and Australia's ongoing drought have crimped the pipeline of staple grains to world markets. Soaring demand for bio-fuels in response to $100-per-barrel oil is diverting crops. And the rise of Asia's twin giants—China and India—is turning them both into market-moving grain hogs. Add to that climate change and a decline in agricultural investment as a percentage of GDP worldwide, and there's little mystery to why food security is a pressing issue from Tokyo to Abidjan. "We're paying the price of complacency," says biologist Robert Zeigler, head of the Philippines-based International Rice Research Institute.

The immediate crisis is one of confidence. As governments with grain surpluses tighten their grip on reserves, countries that rely on imported staples are scrambling to secure supplies. Driven partly by speculation, commodities markets have seen the per-ton cost of rice, wheat and corn surge by 50 percent or more since mid-2007. There are real supply issues, to be sure. But experts blame governments that inhibit grain flows, speculators betting on price spikes and fearful consumers who buy 10 sacks instead of one at the local markets for making the problem worse than it needs to be. When the United Nations' World Food Program issued an "extraordinary emergency appeal" to fill a $500 million funding gap last month, executive director Josette Sheeran said it was the first ever issued over a "market-generated crisis."

Unfortunately the government response is making the market squeeze worse. Richard Barichello, an economist at the University of British Columbia, argues that countries that have recently slapped new controls on exports—including India, Vietnam, Egypt and Cambodia—are putting politics ahead of economics. "It's a beggar-thy-neighbor policy," he says, that reduces incentives for farmers to grow more and leads to black marketeering.

The underlying problem with global food supplies is stark. After spiking dramatically in the 1970s following the introduction of scientific farming techniques during the Green Revolution, crop yields are now rising by less than 1 percent per year, which is half the annual increase in worldwide demand for grain and well below global population growth, now at 1.3 percent. The problem was largely invisible until 2000, when poor Asian harvests and surging regional demand conspired to draw down global grain stocks from 37 percent to 17 percent of annual consumption in three years—erasing a surplus that took a decade to accumulate.

Today's shortage punishes poor nations disproportionately. In countries with low per capita incomes, food is often the largest single component of household spending—up to 80 percent, compared with just 15 percent for the average American or European family. On the United Nations' list of countries most vulnerable to food shocks (according to their demand for imported food), Indonesia, the Philippines and Bangladesh rank first, second and fourth, respectively—and China and India make the top 10 due to their huge populations of rural poor. As grain prices push higher, "a lot of people are going to be forced to tighten their belts when they don't have any notches left," says environmentalist Lester Brown, founder and president of the Earth Policy Institute in Washington. "The people who will be most affected are those who are on the lower rungs of the global economic ladder."

An emergency is now unfolding in what the United Nations calls "low-income food-deficit countries." Most are in Africa, including Congo, Sudan and Kenya. According to the U.N. Food and Agriculture Organization's latest forecast, those nations will import 2 percent fewer cereals in 2007-08 but pay 35 percent more for its food bill "for the second consecutive year." It warned that if the WFP did not receive emergency funding by May 1, it might be forced to cut back aid to 73 million people.

The crisis has put rural development back on the global agenda. "We're coming off 15 years of neglect in research, technological development and [infrastructure] investment in agriculture," says Zeigler, who advocates a second Green Revolution aimed at boosting crop yields above demand growth for grains. In a speech in Washington last week, Zoellick called for a "New Deal for Global Food Policy" and said the bank would nearly double loans for agricultural development to Africa. Mitigating the global food shortage is expected to dominate discussions at the World Bank and International Monetary Fund's spring meeting this week in Washington.

Poor countries are now vulnerable not because food is unavailable but because they can't afford it. "If in a country like India there is a monsoon failure or some crisis in agriculture, the global food situation will become very, very precarious," says Devinder Sharma, an agriculture analyst in New Delhi. With demand from India and China on global markets, he warns that "the world will not have any food grains left for anybody else." That's a theory nobody hopes will be tested any time soon. Which is why the monsoon skies over Kerala are worth watching closely this year.