The Great Disruption

How scarcity, affluence, and biofuel production are wreaking havoc on food prices

Oil has long been regarded as the commodity with the most potential for economic mischief, and the one around which much of the world’s geopolitics revolves. But food is making a case for itself this year.

Riots and protests over food prices have broken out in 30 countries since 2007. Haiti’s prime minister was tossed out of office in April, largely because of protests over the price of food, and the Malaysian government is looking none too stable for similar reasons. In South Africa, discontent over soaring food and fuel prices provided the spark for violence that killed dozens of illegal immigrants last spring. Even in the United States, wholesalers such as Costco limited the amount of rice each person could buy, unsettling some consumers. It’s possible that the most consequential price spike of 2008 will be in food, not oil.

High food prices, like high oil prices, are partly the result of rising demand by a larger, wealthier world population. But food-supply problems have also contributed to the recent spike in prices, and food has become a source of international tension.

The growth of the global food market has meant more food for billions of people, yet it has also led to a greater concentration of supply. In 2006, the top five oil producers supplied 43 percent of the world’s oil. By comparison, the top five corn producers grew 77 percent of the world’s supply; rice producers, 73 percent; beef and wheat producers, 66 percent each. Because of this concentration, a supply disruption in even one place can ripple through the food market worldwide.

Some disruptions are unavoidable. Last year, for instance, drought in Australia, a major wheat exporter, helped drive up wheat prices by nearly 100 percent. But some disruptions are the result of political decisions. For example, in response to the high wheat prices, India, then the world’s second-largest rice exporter, decided to rely on rice, not wheat, for its public food program—and instituted a ban on most rice exports. Vietnam and Egypt, fearing local rice shortages, quickly followed suit. The result was a seize-up in the global market for rice: prices rose from $333 a ton in 2006 to $963 a ton in May of 2008.

The creation of politically popular biofuel mandates by many of the world’s biggest farming nations has been particularly disruptive. U.S. law, for instance, requires that ethanol make up at least 5 percent of vehicle fuel (rising to 22 percent by 2022), and 30 percent of U.S. corn went toward ethanol production last year. The U.S. government has claimed that biofuel demand is responsible for only 3 percent of the increase in global food prices over the past year. But a recent World Bank report estimated that figure to be 75 percent once the resulting economic changes, such as shifts in land use, are considered.

High prices hurt poor, import-dependent nations the most. The price hikes of the past three years threaten to push 100 million people back into poverty, according to the World Bank, erasing seven years of progress.

Prices are anticipated to come down from the panic-driven highs of earlier this year, but many experts believe they will remain far higher than in recent decades. Growth in agricultural productivity is not expected to keep pace with demand, and any new investment in agricultural research is unlikely to produce widespread results for a decade or more. This is “a new era of food pricing,” says Joachim von Braun, head of the International Food Policy Research Institute.

The volatility of this new era—and the reliance of the global market on a few key countries—has stoked fears among many food-importing nations. The Philippines recently announced plans for rice self-sufficiency. And the Persian Gulf States, which know something about supply disruptions, have begun buying up land in Sudan and other countries; they intend to create “sovereign farms” to buffer themselves from the swings of the global market, and the whims of those countries that drive it.