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Q&A: Rising world food prices Q&A: Why food prices and fuel costs are going up
(5 months later)
Food prices are on the rise again, echoing the rapid escalation in prices of two years ago. Food prices around the world have risen substantially this year.
The price of wheat futures on the Chicago Board of Trade commodity market is up more than half since June. And with floods hitting farmland in places such as Australia, which exports its wheat and sugar cane around the world, there are fears that they could continue to rise.
With bread riots in Mozambique, reported grain shortages in Russia, and an emergency meeting at the UN, are we witnessing another food crisis? In January, the wholesale cost of food hit its highest monthly figure on record, according to the UN's Food and Agriculture Organization (FAO).
What's all the fuss about? But while prices were higher than their peak in 2008, when a food crisis prompted riots and demonstrations around the world, the FAO was keen to say that we are not in the midst of another emergency.
A severe drought in Russia has devastated crops there. However, with recent demonstrations in Tunisia and Algeria being linked to higher food prices, alarm bells are ringing once again.
The Russian government has responded to local grain shortages by imposing a 12-month ban on wheat exports. What's more, oil prices are also edging up, reaching their highest level in two years.
Russia typically produces 8-10% of the world's wheat, and exports about a third of what it produces. Why are food prices rising?
With Russia shutting off supplies, there are worries that this will create a global shortage of wheat, meaning much higher prices for grain and other substitute foodstuffs. Following the 2008 peaks, good harvests for most basic foods helped prices to fall back.
Which prices are affected? But in 2010, severe weather in some of the world's biggest food exporting countries damaged supplies.
Wheat is by far the hardest hit. The price of wheat futures on the Chicago Board of Trade commodity market has risen by more than half since June this year, hitting a two-year high. That has helped to push food prices almost 20% higher than a year earlier, according to the FAO. (The 2010 figure was slightly below the annual measure for 2008 as a whole.)
Financial markets also assume that the higher wheat prices will increase consumers' demand for other relatively cheaper foodstuffs, particularly other grains, and this has driven up futures prices for food more generally. Flooding hit the planting season in Canada, and destroyed crops of wheat and sugar cane in Australia.
Higher grain prices are feeding into higher meat and dairy prices, as the cost of feeding livestock increases. In addition, drought and fires devastated harvests of wheat and other grains in Russia and the surrounding region during the summer, prompting Russia to ban exports.
Sugar and oilseed prices have also been rising for separate, unrelated reasons. As a result, wheat production is expected to be lower this year than in the last two years, according to US government estimates.
However, apart from wheat, prices have not yet actually risen far outside the range that they traded in during the last two years. It will still be the third largest on record.
Those are financial markets. What about the real world? But crucially, it is expected lag behind the growing demand for food, which is another key factor pushing up prices.
The prices on commodities markets feed through into prices on the High Street, but with a lag. Have the prices of all foods gone up?
So far, it is mainly only futures prices that have gone up - reflecting market expectations that wheat will become more scarce over the next 12 months. The picture is mixed.
If those expectations turn out to be correct, then the futures prices provide a guide as to what actual prices will do over the medium term. Rice, which is a staple in many Asian countries, hasn't risen by as much as other commodities because a record harvest is expected this year.
Is it as bad as in 2008? In addition, some countries which don't rely on supplies from disaster-hit exporters haven't experienced the same price squeeze.
Commodities prices soared in early 2008 in what was arguably a financial market bubble, before collapsing in the wake of the global recession later that year. Prices of maize in East Africa, for example, where it is the most important food crop, have fallen by up to 50% following bumper harvests.
Things are still some way from those heady days. There have also been more localised weather problems. They have received less coverage - but are no less important to farmers and consumers in those areas.
For example, last time round, the wheat price tripled, from April 2007 to March 2008. Onion prices have soared in India in the past month, following heavy rains in the west, where much of it supply comes from.
But despite the latest upswing, the current price of wheat remains more than 40% below its 2008 peak. Like many governments around the world, the government has come under severe pressure to act, as onions are such an important part of the Indian diet.
The price rises of 2008 also affected a much bigger range of products than now, including energy and metals prices. In Central America, lack of rain has damaged bean crops and caused the biggest individual price rises, according to a recent FAO report.
What's going on at the UN? The price of red beans, part of the staple diet in the region, has almost trebled in the past year in El Salvador and Honduras.
The United Nations' Food and Agriculture Organization (FAO) has arranged an emergency meeting to discuss the implications of the new Russian export ban. What about speculators?
However, a spokesman for the FAO has played down the risk of a another food crisis, similar to what happened in 2008. The FAO says speculators who trade commodities on the financial markets are not to blame for the huge rise in prices, but they have made matters worse.
So when will we see rising prices in the UK? Take sugar for example. Production has failed to keep up with the growing demand coming from developing countries, pushing prices sharply higher.
The latest inflation figures revealed that food prices - notably for vegetables - were going up already. But the Economist Intelligence Unit also points to the role of speculators, who spotted the situation as an investment opportunity and "helped exaggerate" the price rallies.
But the price rises so far are only partly to do with the crisis in Russia. More important for the UK has been the weakness of the pound, which raised the cost of imported foods earlier in the year. The World Development Movement (WDM) is keen to curb this betting on prices.
Experts suggest that this trend might continue, including for bread and meat. It wants greater regulation of the buying and selling of futures contracts - which are an agreement to sell a commodity at a certain price at a set time.
But some factors could dampen the effect here. Food distributors may have signed long-term contracts, locking in lower prices. These were created to reduce uncertainty as the producer has a guaranteed price and the buyer secures the goods they need. It is effectively a way for both sides to reduce the risk of doing business.
They may also choose to take the pain of a temporary price rise on their profit margin, rather than pass it through to customers. But the WDM and others think that trading these contracts like stocks and shares is pushing food prices even higher to the detriment of the poorest people.
How will this affect UK consumers? And what's happening to the price of oil?
The average UK household only spends 10% of its income on food, so the effect of rising prices on consumers is manageable. The price of a barrel of oil has topped $100 on the London market, the highest level for two years.
However, those on low incomes, who spend a greater proportion of income on food, would be the hardest hit. Like food, the increase is a combination of the impact of supply problems, interest from investors and rising demand. Analysts point in particular to the thirst from China for energy to fuel its factories and power thousands of new cars.
How about other countries? And also like food - it is difficult to escape the impact of the rising price of oil.
In many developing countries, people typically spend about 60-70% of their income on food. It not only directly affects the cost of fuel and energy, but also feeds into the prices of other goods by raising the cost of production and transportation.
This makes them particularly sensitive to changes in food prices. As many economies around the world struggle to recover from a painful global recession, wages aren't rising to keep pace. So many are really feeling the squeeze.
The 2008 price rises led to food rioting and malnourishment in many of the world's poorest countries.
So far, things are not that bad, although a spike in bread prices led to rioting in Mozambique that killed seven people.
Russia is, of course, worst affected, thanks to its drought, and it has suffered shortages of many grains, driving prices up dramatically.
Things have been made worse there by speculators and nervous consumers stockpiling supplies, as well as the country's enormous size, which makes imported grain more costly in remoter parts.
What's the longer-term outlook?
Events in Russia will be key, particularly when they decide to end the current export ban. It was due to be lifted in December, but it looks like it might be in place until next year's harvest.
There are some existing factors, too, that could alleviate the situation.
Some countries, such as the US, have existing national stockpiles of grain they can run down in order to smooth over a temporary supply shortage.
Moreover, there is no shortage of agricultural land in the world, and higher prices should encourage higher production.
There are already reports that seed prices are rising, as farmers increase their planting in response to higher sale prices.
Until this year, global food production has been increasingly steadily in response to growing demand.