If we had to identify a likely cause for the next global crisis, it would be food-price inflation — particularly in emerging markets and developing world countries.
The current situation looks dangerous and could easily become dire. When stock markets crash, people get upset. But when food prices become unsustainable, people starve — and then they riot, and even seek to overthrow governments.
A global food crisis unfolded in 2007-2008, related to falling world-food stockpiles and sky-high oil prices (the crude oil price rose above $140 a barrel in 2008).
In the 2007-2008 global food crisis, oil prices played a factor, in part, because significant amounts of cropland and fertilizer were allocated to biofuel production. But it was really more a confluence of factors versus a single thing that went wrong.
In late 2006, agricultural prices had begun to spike in grain-producing nations due to droughts. At the same time, food transport costs were exceptionally high because of high oil prices, and institutional investors were inflating the price of commodities generally via the designation (later abandoned) of commodities as an investable asset class, like equities or real estate.
In extremely poor countries like Yemen, food riots broke out, with the riots leading to clashes on ethnic and tribal lines. During the 2006-2008 time window, average world prices for rice more than tripled, while prices for wheat, corn, and soybeans more than doubled. Fertilizer costs also doubled, with various component prices more than tripling due to scarcity.
The “Arab Spring” uprising of 2011 can also be traced to the global food crisis.
In countries like Egypt — the world’s largest wheat importer — bread prices rose 37%, and annual food inflation to nearly 19%, as a result of the global food crisis. This created intense pain for the populations of Egypt and Yemen, where 40% of citizens lived below the poverty line.
By 2011, food-related levels of civil unrest had become explosive, leading to the fall of Egyptian President Hosni Mubarak in Feb. 2011.
Two months earlier, in December 2010, a 26-year-old Tunisian food cart dealer named Mohamed Bouazizi had set himself on fire in protest, triggering the Arab Spring conditions that reverberated across the Middle East. Bouazizi had been frustrated in part by ill treatment at the hands of authorities, and in part by how hard it had become to feed his eight-member extended family, for whom he was the sole breadwinner.
The conditions that led to the 2007-2008 global food crisis, and the Arab Spring that followed, are not hard to identify: Sky-high oil prices; sky-high transport costs and fertilizer prices; crop failures due to bad weather conditions and global drought.
Not only are such conditions still present, we could be witnessing another global food crisis in the making here and now, in 2021.
The Food and Agriculture Organization (FAO), an international agency run by the United Nations, tracks world food prices via the FAO food price index. As of this writing, the FAO food price index has been rising for nine months straight, in a semi-parabolic manner reminiscent of the explosive run-up in food prices that took place in 2007-2008.
“Global food prices are going up, and the timing couldn’t be worse,” reported Bloomberg on Feb. 28. “In Indonesia, tofu is 30% more expensive than it was in December. In Brazil, the price of local mainstay turtle beans is up 54% compared to last January. In Russia, consumers are paying 61% more for sugar than a year ago.”
Food price inflation will be felt in the rich world, too. But for Americans, it will be more of an inconvenience than a crisis factor, given a flood of transfer payments (stimulus checks) aimed at the lower-income end of the spectrum and a personal saving rate (stimulus checks again) at multi-decade highs.
In the developing world, however, the new trends of food-price inflation developing now could easily turn deadly. Oil prices have already risen to levels last seen before the pandemic. If we see a sustained burst of global demand, the oil price could rise further.
At the same time, transport capacity was reduced by the pandemic — with less capital available for expansion — and weather events are growing more extreme.
Then, too, China is stepping up efforts to ensure food security, which means heavy stockpiling and locking up global supply. “Food security is moving to the top of the government’s agenda,” Bloomberg reported on Mar. 4, “after the coronavirus pandemic and outbreaks of African swine fever raised concerns over whether China could guarantee food supplies for its 1.4 billion people.”
The United States is also making life hard on emerging-market countries — with food-price inflation aspects part of the problem — through the exporting of tight monetary policy at the long end of the curve.
Because the U.S. dollar is the world’s reserve currency, higher yields for the 10-year note and 30-year treasury bond result in tighter monetary conditions elsewhere.
Yields are rising at the long end of the curve because U.S. economic growth — purchased with a tsunami of stimulus — is expected to be red hot (see Goldman’s call for 8% U.S. GDP growth in 2021). But other countries, whose pockets are not as deep, have weaker economies and less ability to stimulate.
This means that, when these countries’ economies are hit by tighter monetary conditions via U.S. transmission effects, they have to expend currency reserves buying their own bonds to keep interest rates down (which weakens the currency) or else take steps to weaken the currency directly, the alternative being a new downturn or recession.
And if the dollar is getting stronger on its own, as the U.S. sucks in capital through its world-beating economic growth profile, the currencies of other countries (and emerging-market countries in particular) will also weaken on their own. This currency depreciation, born of various sources, then adds to the pain of rising food prices, with higher food costs hurting economic growth, thus requiring efforts to stimulate or weaken the currency further, in a vicious spiral.
The food price issue is worth keeping an eye on, particularly for emerging-market investors. At some point in the coming years, we anticipate turning strongly bullish on emerging markets. But given the growing risks of food-price inflation, and the ease with which a new crisis could unfold — coupled with a near-term strong dollar outlook that makes those risks worse — that time has definitely not arrived yet.