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reflections

Apr 18, 2008 | 02:23 GMT

4 mins read

Geopolitical Diary: The Cost of the High Price of Grain

It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.
Thousands of union workers demonstrated in Johannesburg, South Africa, on April 17, in part to protest skyrocketing food prices. The recent food riots in Haiti led to the overthrow of that troubled island state's prime minister, Jacques-Edouard Alexis. These are just the latest in an emerging global trend of unrest sparked by high food prices –- specifically, the price of grains. And it is the grain issue that could have the most far-reaching implications. Wheat, corn, soybeans, rice and the like are the essential foodstuff — not just for humans, but for most livestock, especially in more developed agricultural sectors. Meat, dairy and vegetables are perishable, and the markets can usually deal with the rise and fall in their supply without anyone going hungry — but only so long as grain remains readily available. And that is not the case. Several factors are converging that contribute to the lower level of grain supplies:
  • Grain reserves are already being depleted. The U.S. Department of Agriculture has reported that global grain reserves are at their lowest level since 1960. Consumption, in other words, is already testing the limits of global supply.
  • Prices reflect this increased consumption. This year, soybeans are as expensive as they have ever been, and corn costs more than it has in more than a decade.
  • The rise in prices of other global commodities such as oil is compounding cereal prices. Increased fuel makes cultivation, harvest and transport of grain more expensive.
  • The rising use of biofuels has begun to cut measurably into grain supplies. The International Grains Council says biofuels may account for as much as 6.5 percent of the consumption of the worldwide 2007-2008 crop. Unless trends reverse, this level of consumption is likely to continue to increase.
  • As the developing world becomes richer, its citizens are more likely to consume meat. Production of meat on a calorie-by-calorie basis requires roughly 10 times the amount of grain as simply eating grain (the livestock eat grain too).
  • Incidental events such as droughts in the Balkans and in the former Soviet Union and mold creeping toward South Asia are reducing production.
In this environment, net exporters of grains will begin to export less both to contain inflationary pressures and to ensure ample local supplies –- which shrinks supplies for net importers. (Most of the world’s arable land is already being cultivated, and there is little room to meaningfully alter the global supply level in the near term.) Already we have seen such restrictions out of countries as separated by climate and distance as Argentina, Kazakhstan, India and Indonesia. Richer states can largely afford such increases with some hits to their disposable incomes. And most rich states — Australia, Canada, New Zealand, the United States and the European Union as a whole — are food exporters anyway. But given the rise in other commodities and ongoing attempts to absorb increasing energy costs (especially gasoline), higher food prices are not likely to help economies already flirting with recession. As the pressures mount, even the richest states could see substantial problems bubbling through their lower classes — which will be most impacted by any price rises. But while Americans might have to put off some luxury purchases, people in the countries of the developing world will begin to feel the pinch far more acutely. Hell hath seen no fury like a food riot. Starving people are difficult to console — ask Louis XVI or the leaders of Weimar Germany. And governments will be stuck with a choice between cracking down or falling, neither of which is good for stability in the developing world. There is no "perfect storm" yet, and harvests are often determined by that most unpredictable of forces: weather. However, addressing a food mismatch on a global scale is a task that takes years — not weeks or months. The current confluence will bear considerable watching and will continue to be a part of STRATFOR's Intelligence Guidance in the weeks to come.

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