A Future of Price Spikes

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Alexandre Severo for TIME

Red vs. green Rising incomes give more people a taste for meat, which is costlier to produce than vegetables

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With demand steadily rising, the world is closer to disaster because the food safety net has shrunk. In the late 1990s, we had enough corn stashed in reserve to meet world demand for about four months; now we have enough for only about 12/3. From more than four months' supply of wheat in storage, we have gone down to just over three (and in recent years, reserves have fallen even further).

That's made global food markets susceptible to ever more extreme price spikes caused by floods, droughts and other unpredictable acts of Mother Nature. Wheat prices soared last summer when wildfires and drought destroyed a third of Russia's grain crop, while corn prices reached dizzying heights in part because of a weak harvest in the U.S. "There's not much of a cushion to deal with any kind of shocks, and shocks are what we're getting," says Soozhana Choi, head of commodities research for Asia at Deutsche Bank in Singapore.

High food prices are bad news for everyone. Rising prices have stoked inflation in China and India, forcing their central banks to hike interest rates to dampen growth. Because emerging markets have been driving the global recovery, slower growth in China and India is a drag on the world economy. Bigger grocery bills also hurt growth by eating into consumer spending. As a larger portion of people's paychecks is spent on bread and beef, less is left to buy LCD TVs, cars and plane tickets.

The pain caused by expensive food is especially severe for the poor. Low-income families in Africa and elsewhere tend to spend a majority of what they earn on food, so high prices make them poorer, hungrier or both. The World Bank estimates that 44 million people in the developing world have been thrown back into poverty by recent price increases. In the village of Saddarpur, not far from New Delhi, food has become so pricey that Nimmi Singh, a domestic helper, had to triple the number of houses she cleans to bring in extra rupees. "We have a hand-to-mouth existence anyway," Singh complains. Now "the markets are totally untouchable."

Although commodity prices have retreated from their highs, prices overall are expected to remain much higher than they were in the past. "All the factors that cause food-price spikes are going to continue into the future," says Jay Naidoo, chair of the Global Alliance for Improved Nutrition, "and it's going to get worse." In a June report, the FAO and the Organisation for Economic Co-operation and Development (OECD) estimated that cereal prices will rise as much as 20% and meat prices up to 30% over the course of this decade compared with the previous one. "We talk scarcenomics," says Craig Cogut, founder of Pegasus Capital Advisors, a New York City — based private-equity firm. "When you look at food and water and energy, you see rising populations and resources becoming scarcer. Rising food prices are a fact of life." Pegasus has invested in a joint venture that sells organic and antibiotic-free chicken and turkey.

Another Green Revolution
So avoiding the malthusian conclusion rests, as ever, on our ability to invent ways to exploit our planet's limited resources more effectively. During the green revolution of the 1960s and '70s, technologically advanced high-yield seeds and investments in irrigation systems and other infrastructure spawned huge increases in food production. The problem is that as prices fell, policymakers starved the world's farmers of investment and aid, depriving them of the tools they needed to produce more food. Some 60% of the farms in India still have no access to irrigation, for example, leaving them dependent on the erratic annual monsoon.

Funds to develop new technologies also dried up. Middle- and low-income countries allocated 20% of R&D spending to agriculture in 1982, but by 2000 the share had slipped to 12%. As a result, farms have become less productive. The FAO-OECD report projects that global agricultural production will grow 1.7% a year on average from 2011 to 2020, compared with 2.6% during the previous decade.

What we need is a new green revolution. That will require money — lots of it. Governments in India, Senegal and other emerging economies have already started spending more on agriculture in a new quest for food security, but those increases are insufficient. The FAO estimates that more than $200 billion in agricultural investment is required each year in the developing world to meet food demand — a hefty 50% increase from current levels.

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