Food prices fall, crisis lingers on

For the first time in more than a year, global food prices are declining though that does not mean the problems facing the world are over – according to recent figures from the Food and Agriculture Organisation (FAO) of the United Nations.

In April, FAO food price index fell for the first time in 15 months. The latest Food Outlook report this month suggests a better harvesting season for 2008/2009 than the previous year, which means more food supply in global markets. Yet, the world still faces a food crisis hurting hundreds of millions of poor people, especially in the developing and underdeveloped countries.

FAO is holding High-Level Conference on World Food Security and the Challenges of Climate Change and Bio-energy in Rome from June 3 to 5, which will be attended by the UN secretary-general and many heads of states.

As for the prices, many analysts estimate them to cyclically correct in the short to the medium term. The Economist Intelligence Unit says in its latest article the rise in prices since 2006 may cool soon. EIU's food price index rose by 16 per cent in 2006 and 31 per cent in 2007, and is now at an all-time high. But it suggests: "We are forecasting a further rise of 40 per cent in 2008, although that is based mainly on rapid rises in the first half of the year, we expect prices to stabilise in the second half and to remain at close to this level for the next few years."

According to FAO's Food Outlook a few days ago "international prices of most agricultural commodities have started to decline, but they are unlikely to return to the low price levels of previous years".

The FAO food price index has remained stable since February 2008, but the average of the first four months of the year is still 53 per cent higher when compared to the same period a year ago. Prices seem to be not responding to the anticipated supply increase fuelled by better crop conditions.

FAO forecasts world cereal production in 2008 to reach a record output, now at nearly 2.192 million tonnes, up 3.8 per cent from 2007. Among major cereals, the tight wheat supply is expected to improve most, given the prospects for better harvests this year. And looking at the latest figures from FAO and other sources, the assumption is that global demand for food is not growing exceptionally high though import might be increasing rapidly in anticipation of tighter markets. Thus FAO indicates that the food import bill "of the low income food deficit countries is expected to reach $169 billion [Dh621bn] in 2008, 40 per cent more than in 2007".

The notion by some politicians in the developed world, including the United States president and the German chancellor, that changing eating habits of populations in emerging economies, including China and India, is responsible for the global food crisis seems baseless by looking at meat and dairy demand in such countries over recent years. In addition, food constitutes a bigger part of household budget in the less developed countries, amounting to 60 per cent in underdeveloped ones, while it might not reach double figure percentage in the developed world. So, increasing demand is widespread and might even be dampened in the developing world.

Part of the problem might be, as some analysts suggest, the increase in biofuel production adding to the demand on some agricultural products. Some farmers in South America and elsewhere are growing corn for ethanol production to feed the US biofuel market. This is going to be a thorny issue at the FAO Rome summit, as the UN is not too enthusiastic about use of agricultural produce as energy substitute, especially with no proven environmental benefit as claimed – it is not that clean an energy anyway.

But the main reason behind market volatility when it comes to food prices is the speculation by investment funds in future contracts of food and crops. Since turmoil started to dominate financial markets last summer, triggered by the US sub-prime crisis, investors targeted soft commodities' markets to make better profits. Continuing decline of the dollar made future contracts in dollar-denominated commodities a safe haven for investors. With hard commodities' markets such as oil and gold already under heavy speculation, wheat, corn and soya future markets became a magnet for speculators.

Exactly as the case of the oil market; prices not consistent with market fundamentals of supply and demand, food and agro-produce prices are rising due to speculations. Whatever the supply increases, speculators would keep on the heat and consumers would still be scared of a food-shortage disaster. So keep buying to replenish stocks and feed speculators greed.

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