The threat of global food shortages - part one

India - the second largest rice exporter in the world, with 5 million metric tons last year - put barriers on rice exports, and other rice exporting countries followed suit, as rice prices started to spike.

The newly elected populist government in Thailand did not want consumer prices for rice to go up, and the commerce minister openly discussed export restrictions from Thailand - the world's largest rice exporter, with 9.5 million metric tons last year. On March 28 rice prices in Thailand jumped $75 per metric ton.

Since then, prices have continued to skyrocket and now, when rice is available at all, it costs more $1,100 per metric ton. This is the stuff of panics.

Rice stocks in Asia have come down over the past decade, but that was a sensible response to growing reliance on trade as the buffer. Holding rice stocks in tropical conditions is extraordinarily expensive, so a smoother flow of rice internationally reduces wasteful stockholding. Now that the exporting countries put bans on rice exports, nearly all countries will be forced to resort to domestic stockpiles. That is a real tragedy for poor consumers and for economic growth.

The most volatile element in the food commodity boom is the “hot money” in search of the next investment boom after the crash in tech stocks followed by real-estate derivatives. The real trigger for the current spike in food prices is speculative behaviour on the part of large investment/hedge funds with hundreds of billions of dollars looking for the next price bubble.

The combination of a rapidly falling dollar, movement of investment funds into commodities, especially petroleum, and then out to other commodities is the trigger needed for the food market to explode. The Bank of International Settlements in Basel estimates that hundreds of billions of dollars are now invested in commodity funds.

The need for changes in trade policy in the world rice market is clear. With India, Thailand and Vietnam - the three largest exporters to the world rice market - all more-or-less withdrawn from the market, and importers such as the Philippines and a number of countries in Africa increasingly desperate to lock in supplies, there is a need for a high-level forum to get all countries to agree to keep their borders open to rice imports and exports, even in times of crisis. Otherwise we have a 1930s-style depression with "beggar my neighbour" policies causing each economy to spiral downwards.

The longer-run question is whether supply dynamics will begin to match the rapid growth in demand. In past episodes of high food prices and fears of Malthusian crises, supply responses have been vigorous, albeit with a lag, returning world food prices to their long-run downward trend. This time, arguments increasingly suggest that there is little supply response left in the system, for three basic reasons:

1. there is little high-quality agricultural land to be opened;
2. the yield potential of existing agricultural technologies has been static for decades: closing the gap between this yield ceiling and actual farmer practices is the only source of increased output, and this gap has been closing rapidly everywhere except Africa; and
3. the costs of inputs needed to achieve higher yields are high and rising, especially for fuel, fertiliser and water.

Unless major exporters and importing countries can arrive at an agreement to cool the hoarding and speculative binge, the prospect is that high food prices, perhaps near current levels, will be a market reality for many years.