A darker side of Shifting Wealth is the stress it has imposed on the supply-demand balance of cereals and other food staples. Good: World cereals consumption/person/day has been rising continuously over the last two decades. Scary: the stock-to-use ratio for world cereals has been falling pretty consistently since at least the late 1990s. With such a tense supply-demand balance, bad harvests can lead to nasty – and for the poorest, deadly - price spikes. Notwithstanding the many, many international organisations dealing with food, the 2008 food riots erupting in countries along the equator took many by surprise.
The G20 and others are working hard at coming up with action plans to avoid food riots that can easily bring down governments, as indeed happened in Haiti in April 2008. But how close is the link of food riots and, yes, what exactly? Are we talking food insecurity, food price volatility, or food price levels? That is rarely made clear, perhaps as some ‘constructive ambiguity’ is the common denominator on which unanimous official declarations can be based.
Consulting www.africaneconomicoutlook.org ,the award-winning website and a treasure of economic and social information on Africa, it collects interesting data on the number of civil unrest. (New numbers on civil tensions will be published on the 6th June, when the AEO 2011 will be released; for 2010, they went down further while 2011 is an entirely different story, and not food related). Link those data to an index of food prices from the IMF WEO October 2010 (with 2005 = 100), and you find a graph that is not very clear about the relation of civil tension and either food price level or volatility. This deserves further investigation as we ignore the degree of political repression behind the apparently loose connection of food prices and civil unrest.
Food price vulnerability, we learn from an interesting recent Citi study* (not online, unfortunately, but I am sure you get it on request from the author, or from me), can take an entirely different meaning. For central bankers and investors, that is, especially in combination with higher energy prices that stimulate demand for biofuels which in turn reduce the food share in agricultural output, leading to even higher food prices. Generally, food prices weigh more in consumption baskets and thus price indices when countries and citizens are poor. For investors and central bankers, however, the equation is a bit more tricky.
The biggest inflation risks – and thus the biggest upside risks to interest rates – will come from countries that have three characteristics, we learn from a simple Citi model:
- High correlation of yearly changes in food and general prices,
- A small output gap, and
- Loose monetary policy (compared to the past).
Guess who leads Citi’s food price vulnerability list:
* Lubin, David (2011), “Food Prices Revisited: Who’s Vulnerable?”, CITI, Emerging Markets Macro View, 19th January, London.