The rise in food prices is likely to put enormous pressure on emerging market inflation and lead to increased political instability.
A number of factors have helped contribute to the rise in food prices.
Changing consumer spending. Changing consumer spending habits and growing consumer income have pushed up demand for food products. A growing population has also not helped in any way.
Climate change. Temperature changes and flooding have had a severe affect on food production and supply. Sub Saharan Africa and vulnerable countries like Bangladesh will be under increased pressure to meet food output targets.
Alternative energy. The drive for alternative energy, in particular ethanol, has increased staple food prices which are in turn contributing to rising inflation. Consumers and farmers ranging from the US and Mexico to South Africa are feeling the impact. Some of these strategies were ill conceived from the outset and need to be reevaluated.
Hedging and speculation. Hedging and market speculation are further driving up prices. Countries like Singapore are building up supplies to hedge against further price increases. The Philippines police are currently playing a game of cat and mouse with rice hoarders.
The crisis, however, provides some unique opportunities for governments. Food subsidies in the west are currently hurting millions of farmers in developing countries while benefiting a few. By reducing food subsidies, millions of consumers across the globe will benefit. After all, poor emerging market consumers are currently hurting the most. Unfortunately, recent food scares in China have played into the hands of the farm lobbies and protectionist groups. Action is needed and the recent World Bank measures will not go far enough.
