A crisis that grew under the shadow of 2008’s Great Recession

This article appeared originally in Gulf News: link to original article

A lot of attention was paid to the financial crisis of 2008. Regulations were introduced and somewhat enforced; stress checks became standard practice in understanding where the banking sector is headed; and various monetary and fiscal measures were carried out to bring back economic growth.

The same year also witnessed a food crisis which, relatively speaking, garnered much less attention than the financial crisis. This is despite the fact that the build-up to the 2008 food crisis began in 2006, as prices for maize, rice, and wheat ascended to levels that inflated food import bills for countries and made necessary food commodities unaffordable for rural populations. This left countries in a dire fiscal situation and rendered rural populations’ food sourcing insecure.

According to the Food and Agriculture Organization of the United Nations (FAO), its food price index rose “by 63 per cent between January 2007 and June 2008”, where “international prices of traditional staple foods such as maize and rice increased by 74 and 166 per cent, respectively”. In the second-half of 2008, domestic prices for maize, rice and wheat, were “about 40 per cent higher” than their levels 10 years ago.

The 2008 food crisis is attributed to a few factors.

One, the increase in food prices is linked to an increase in oil prices, especially given the 1973 precedent and the higher food prices that correlated with it. In fact, the recent increase in prices of maize and wheat mirrored that of oil towards their peak levels in 2008. The price of rice increased the most among the three, as less than 10 per cent of all the rice produced globally is traded, i.e. exported and imported.

Two, higher production of biofuels, which means that more farmland and food commodities are going into their production rather than to other uses. This was especially the case for maize and sugar.

Three, the possibility of a food shortage at the time of the crisis, which limited supply while demand for food is constantly on the rise, theoretically at least.

Any of the above factors could be the cause of the 2008 food crisis, or could have simply correlated with it, without necessarily causing it. There was no shortage in food production around the time of the crisis. There was however an unprecedented increase in demand for food that was not destined to feeding the populace or the hungry.

While there is no denial that the above-mentioned reasons could have contributed to the hike in food prices, the main reason behind the 2008 food crisis was the 2008 financial crisis itself.

When the world started to feel the ramifications of the 2008 financial crisis, institutional investors as well as speculators started moving their investments from mortgage-backed products to futures and options that trade in food commodities. In a report by the UN, more than $300 billion were invested in such products.

As demand for the futures and options went up, so did demand for actual food commodities that are required to fulfil those contracts. The sudden surge in demand caused an unaccounted for imbalance between demand for food and its supply, with food prices increasing as a result.

The increase in international food prices was detrimental for countries that relied on food imports to meet their needs. Not only because such reliance significantly increased their food imports, but because producers and exporters of rice and wheat decided to impose export bans on those commodities.

In his account of the 2008 food crisis, Walden Bello, author of “The Food Wars”, points out that “countries like China and Argentina resorted to taxes or quotas on their rice and wheat exports to avert local shortages”, while “rice exports were simply banned in Cambodia, Egypt, India, Indonesia, and Vietnam”. Export bans limited food supply at a time when it was facing a sudden surge in demand from investors and speculators, which further aggravated the crisis.

High food prices and export bans that pushed those prices even higher have made countries weary of importing food and keen on establishing, or re-invigorating, their agricultural sector. Post-2008 data for food production, food imports, and food exports show a general increase in the Self-Sufficiency Ratio (SSR) — a ratio calculated by FAO that measures the production of a food commodity in proportion to its net overall supply in a country.

This includes countries that were self-sufficient at a certain point and were lured away by cheaper food imports.

To sum up, the 2008 food crisis would not have taken place if not for the 2008 financial crisis and the shift in investments from mortgage-backed to financial products that deal with food commodities. The heightened speculation in food-related futures and options have thrown global food markets off balance, resulting in higher food prices that were pushed even higher with quotas and export bans.

Other factors, such as higher oil prices and higher production of biofuels have added to the mix of factors that increased food prices to the unprecedented levels witnessed in 2008.

Higher international prices for key commodities such as maize, rice, and wheat, which constitute 60 per cent of global energy intake, have dissipated into higher domestic food prices. Food importing countries footed a financial bill in addition to unrest as food protests broke out in tens of countries following the 2008 crisis.

Non-food producing populations footed the bill too by being locked out from a food market that was, until the 2008 food crisis, affordable. Consequently, countries re-visited their food self-sufficiency plans, and many have re-started them too.

The last thought that I want to leave you with: at what cost should higher self-sufficiency in various food commodities be sustained?