The food crunch

Climate change and population growth are making food supply problems worse and leading to price spikes. What can be done? James McKeigue reports.

Climate change and population growth are exacerbating food supply problems and leading to price spikes. What can be done? James McKeigue reports.

What's happened?

Global food prices have spiked for the third time in five years. Prices for key crops such as corn, wheat and soya are hovering near all-time highs. That has a big knock-on effect further down the food chain, including for meat prices. In 2008, high food prices caused riots in several countries, while two years later the food spike fuelled the discontent that lead to the Arab Spring. Some now fear repeated food crunches' mean we will struggle to feed ourselves in the future.

Why has it happened?

The main trigger was droughts in America and Russia two of the world's major grain exporters. Scientists, including those at the UN's Food and Agriculture Organisation (FAO), believe climate change is making severe droughts more common. That's why the Samsung Economic Research Institute (SERI) predicts that global grain production will fall 2.7% per year.

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Another trend putting pressure on food supply is the world's growing population the planet will be home to an extra three billion humans by 2050 an increase of about 40%. The FAO estimates that such a rise would need a 70% increase in food production. It hardly helps that trade policies stop us benefiting from the food we produce.

How do trade policies make things worse?

When prices rise, countries are often quick to ban exports of a particular food to protect their own citizens. Between 2007 and 2011, 33 countries imposed import restrictions on food. In 2010 Russia banned wheat exports when production was hit by wildfires. Yet, says The Economist, "when so many countries do the same food disappears from global markets [meaning] prices rocket more than if governments had left well alone".

While agriculture makes up less than 10% of world trade, it accounts for two-thirds of the cost of all cross-border price distortions. A case in point is the EU's Common Agricultural Policy (CAP). Every year it gives EU farmers a single farm payment' per acre of land, regardless of whether it is farmed or not. CAP costs €60bn a year, 37% of the EU's budget. Critics claim these payments distort the market and stop more efficient countries from competing with cosseted European farmers. Politicians tend to blame speculators.

Are speculators to blame?

Speculating on agricultural prices is nothing new. Aristotle writes of the poor philosopher Thales who developed a "financial device" to bet on the olive harvest in ancient Greece. Both farmers and consumers have used derivative contracts that lock in prices for centuries. But developments such as the creation of index funds to track soft commodities have swelled the numbers of agricultural speculators.

The overall impact is far from certain. In a recent report, professor Christopher L Gilbert of Trento University found that extra investors help to provide useful liquidity (the ability to enter a contract or close it). Besides, speculators often don't make money. The FT reports that hedge funds speculating on the wheat price missed "the turn in the grain market" in June and made losses. So rather than point the finger here we should focus on boosting production and cutting waste (see below).

Can anything be done to do that?

The last great boost to agricultural production happened in the 30 years following World War II when the introduction of machinery and fertiliser heralded the Green Revolution'. Most of those easy steps have already been taken in Europe and the Americas. However, there is still lots of low-lying fruit', especially in Africa, where agriculture could benefit from modernisation.

Scientists are also paving the way for a second revolution: genetic modification can help boost yields and create new crop varieties that can grow in harsher conditions. Scientists are also developing new plants that will produce biofuels more efficiently and free up space for food crops. An example of a country combining aspects of both green revolutions is Brazil, says The Economist.

Thirty years ago Brazil imported food now it's one of the world's biggest agricultural exporters. It completed the turnaround by transforming lots of acidic savannah, known as cerrado, into farmland. Huge swathes of land were treated with limestone to become less acidic, while new strains of crops were developed that could grow in the tough conditions.

Meanwhile, government funded research gave large agribusiness free rein to develop super-farms. The results have been astounding. Brazil's grain production is up by around 60% since 2000 while its soybean output has quadrupled. All this in a climate previously alien to large-scale farming; Brazil is the first tropical agricultural exporting giant.

The scandal of wasted food

Due to appalling transport and storage infrastructure, up to 40% of the food produced in India rots on its way to the market. In America, food may get to market, but around 40% is thrown away after it's been bought. If some of that waste could be cut, less food would need to be produced.

India, home to one sixth of the world's population, recently announced plans to open up food storage and distribution to foreign firms. "Bringing that efficient, clean and secure logistics chain into the country is going to reduce the amount of food that goes to waste", says Tim Worstall in Forbes.

In richer countries, a recession and higher food prices is encouraging consumers to throw away less. WRAP, a lobby group that tracks rubbish, reckons British household food waste fell to 7.2 million tonnes in 2011, down from 8.3 million tonnes in 2007.

James graduated from Keele University with a BA (Hons) in English literature and history, and has a NCTJ certificate in journalism.


After working as a freelance journalist in various Latin American countries, and a spell at ITV, James wrote for Television Business International and covered the European equity markets for the London bureau. 


James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. 


He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.