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Global food prices on the rise again

With so many nations depending on grain imports from the US to supplement their own harvests, and because intense drought and floods are damaging crops elsewhere (for e.g. Russia's wheat production plummeted 12.5 per cent), food supplies are expected to shrink and prices to rise across the planet.

Syed Mansur Hashim
The severe drought that hit the United States (US) this year has affected some 80 percent of corncrop produc-tion and 11 percent of soya bean crop. When we take into account the fact that the US alone contributes to
35 percent of the global supply of corn and soybean, the impact of such low yields due to adverse climate induced changes is already having a detrimental effect on the global supply chain. With an increase in world commodity prices, the effects will be felt by all maize and soya importing nations, including Bangladesh, leading to fears of yet another food crisis that triggered political and social unrest in 2008.
Although there are other large producers of grains like China, the world's largest producer of wheat, it also happens to be the largest consumer. But it is the US that is the largest exporter of these two crucial crops, which not only feed millions of people but are also used produce feed stock for animals. As stated by Council on Foreign Relations's Isobel Coleman, "Around the world you have rising middle-classes, a growing demand for meat and protein in the diet, and countries around the world are becoming increasingly dependent on relatively inexpensive food stocks from the United States. When you see a crop failure of the magnitude you have seen this summer, it flows through the whole food chain.”
The sharp drop in rainfall has produced the worst drought to hit the US in half a century. The US Department of Agriculture is already predicting a price rise of food across the board to the tune of 3 to 4 percent next year and the drought is predicted to have affected two-thirds of the country. "This is a once- or twice-a-century drought, and it's more severe than anybody has been preparing for," says Robert Thompson, former director of agriculture and rural development at the World Bank. "It's huge with respect to the world market for maize and soybeans." The repercussions are already being felt worldwide. World Bank data points to a rise in global prices for corn and wheat to the tune of 45 and 50 percent since mid-lune and soybean prices have shot up nearly 30 percent since )une 1.
Yet it is not only US crops that have been affected by little rain. Climatic shifts in weather have affected most of the large wheat producing regions including Ukraine, Russia and Kazakhstan. This has led many nations to start stockpiling grains with Russia and Ukraine severely curtailing exports which put further strains on the global supply chain of wheat.
A constricting supply of essential crops such as soybean and wheat will inevitably have serious consequences on cereal stockpiles that aid agencies use to feed the millions of hungry across the globe. As put by Rene McGuffin, a spokesman for the UN World Food Program (WFP) recently, "High and volatile food prices affect WFP and our ability to
feed the world's hungriest poor in two ways. We have to spend more to purchase food for the hungry — and we estimate that every 10 percent increase in the price of the food that we distribute means an additional $200 million a year is required to buy that same amount of food. At the same time, the volatile food prices drive up the number of people needing food assistance."
With so many nations depending on grain imports from the US to supplement their own harvests, and because intense drought and floods are damaging crops elsewhere (for e.g. Russia's wheat production plummeted 12.5 percent), food supplies are expected to shrink and prices to rise across the planet.
Bangladesh will have to face the same music as other nations in Asia due to changed circumstances. Given that the country is overly dependent for import of a number of cereals including soybean and that that global food markets will face volatility due to climatic shocks, a number
of instruments may be used to counter prices volatility associated with import bills, i.e. going with either futures and options contracts (financial instruments) or over the counter (OTC) contracts (physical instrument).
The main difference between them is that financial instruments can provide a country with a cash payout to enable them to offset higher food prices for physical imports, whereas physical instruments seek to manage price and supply risk and provide for the physical import of the food. Both types of instruments are offered by financial institutions and traders. But again, Bangladesh may not have the required reserves in foreign exchange to take advantage of such available instruments. Given its constraints, targeted assistance to those most in need, either using cash transfers or direct food assistance, may be the most effective and equitable way of reaching those affected by a food price crisis.
The writer is Assistant Editor, The Daily Star.