By Dirk Seel
'Breakfast’ commodities currently capture headlines as their prices hit multi-decade highs. Although sugar, coffee, tea and orange juice do not qualify as vital crops, their price hike should still be seen as a warning sign of a potential food crisis repeat.
Let’s recap: driven by drought-impacted poor global harvests, growing consumer demand, rising energy costs and financial speculation, the prices of agricultural commodities dramatically increased in 2007-08, causing food riots and political instability worldwide.
Given that the prices of rice, corn, wheat and soy have fallen amid the recession to today’s relatively depressed levels, can we assume that the threat of another food crisis is history? Clearly not. Instead, the driving forces behind the current production shortfall in breakfast commodities seem to be very familiar.
Take sugar. Following a global production deficit, its price has so far risen to a 28-year high. Government authorities around the world blame poor weather conditions for the severe shortage. But there are fundamental problems too. One is regulation. Sugar is among the most heavily manipulated agricultural commodities. From import levies to production quotas and statutory minimum prices, governments worldwide use interventionist mechanisms to maintain certain price levels. The real price of this policy can be seen in India. Millers, angry about imposed higher minimum prices, made their payments late, which led farmers in 2007-08 to abandon sugar for more profitable crops such as rice. With production down 40%, the country this season switches from being a net exporter of sugar to a net importer.
A lack of arable land dedicated to cane cultivation is not the only problem. Consider the world’s ever-increasing demand for energy. Already today, about 60% of Brazilian sugar cane is used to produce ethanol, a petrol substitute. With a rising oil price, this percentage looks set to increase further. Add developing countries’ growing appetite for sweet food, and you get an idea of the heavily imbalanced supply-demand curve.
As such, the current price hike of breakfast commodities should be seen as a reminder that another food crisis is looming. After all, the fundamental drivers that contributed to last year’s crisis have not disappeared.
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