Brazil has just become the latest country to restrict rice exports, after Egypt, India and Vietnam. Brazil actually produces more rice than it consumes, so there is really no shortage. However, rice producers have been attracted by the rising prices available on the world market and were demanding similar prices from domestic buyers. The Brazilian consumer yelled, alarmed by the way his weekly marketing bill is rising, and the government took note, decoupling the domestic rice market from the international one by banning exports. The hope is that rice, which would otherwise be exported, now has to be sold to local consumers, with the effect of keeping prices low.

Brazil's neighbours, cut off from their imports, now face a shortage, and so the problem spreads.

Much has been written about why we suddenly have a global food price crisis, and rice is not the only food commodity whose price has escalated, though it's been making the most headlines (Yesterday, the benchmark Grade B Thai rice touched US$1,000 a ton). As you can see from this chart from the Economist magazine, wheat and maize too have seen huge price increases since the middle of 2007.

The causes are somewhat different for each grain, though one common factor is the steep rise in the price of oil. This has raised the cost of fertiliser for farmers and transport for distributors. But besides that, each grain has its own dynamic. For wheat, apparently the great Australian drought did suppress worldwide tonnages. For maize, much was diverted to making ethanol following the surge in crude oil prices, now hitting US$120 per barrel. Furthermore, demand for maize as animal feed has skyrocketed as more and more newly rich Chinese and Indians take a liking to meat.

Rice is the odd one out because worldwide there has been no sudden shortage. Total tonnages are expected to be stable, though reserve stocks have been gradually falling over the years as production failed to keep pace with increased demand. Rice yields have also shown less than 1% growth per annum for the past decade, and more and more farm acreages have been taken out of production due to urban spread. Yet, these factors have been creeping up for a long time, but only in the last 12 months has the price of rice stolen the limelight.

That may be because it was only last year that things reached a tipping point. In October 2007, the U.S. Department of Agriculture made a projection that global consumption of rice would be 424.7 million tons for the same year, up from 418.4 million tons in 2006. However, 2007 global production was expected to rise only marginally to 418.5 million tons in 2007, from 418.2 million tons in 2006.

 
Not just supply and demand

However, it's not just supply and demand. Food commodities like rice have also been affected by the rush into commodities by fund managers, thus bidding up the price. Indeed, ever since the US economy started to look vulnerable to the mess in the subprime housing mortgage market, fund managers have been looking for other ways to get a good return. Commodities is the thing. You can see from the chart above how prices started taking off in mid 2007, when worries about the US economy set in.

What this shows is how the food price problem is a symptom of the strains the highly-integrated global capitalist system is facing, where ultimately everything is affected by money sloshing around, causing financial bubbles.

Why is there so much money sloshing around?

I would put it to 2 trends that we've seen over the last 2 – 3 decades, where money has been gradually concentrating in the hands of the few.

The first is the steadily widening wealth gap within countries, where the rich have benefitted more from economic growth than the poor. The former are now sitting on top of vast funds, looking for investments, or at least safe havens.

The second is the imbalance between countries. China, Japan and some other Asian countries have been accumulating surpluses for years. More recently, the oil-producing states have seen their treasuries fill to overflowing.

Naturally, the people losing out in this vast redirection of money are the poorer folks in countries with widening income gaps. They have been facing a worsening disadvantage in purchasing power, but it has taken a sharp jolt in the price of food, oil and its derivatives, to turn the hidden trend into a political problem spanning many countries.

Today, the flash point is Egypt (where the cost of food has doubled in a year) but last year Italians marched in protest at the cost of pasta and Moroccans over the price of bread.

The more recent protests include riots in Haiti last week that killed four people; violent protests in Ivory Coast; price riots in Cameroon in February that left 40 people dead and demonstrations in Mauritania, Mozambique, Senegal, Uzbekistan, Yemen, Bolivia and Indonesia.

-- The Guardian, 9 April 2008, Who is fighting over food?

What's to be done? Many governments' kneejerk reaction has been to intervene in the market, imposing price ceilings and rationing. As the case of Brazil and others show, export bans have also been part of the mix.

But this is self-defeating. The problem will not go away unless we let price signals work. In time, farmers benefitting from higher prices will be encouraged to increase output. They can be helped by state support for irrigation systems and crop research.

None other than the Asian Development Bank (ADB) has pointed this out. In dealing with the food crisis, it recommends income support for the poor, not interventions that distort the market. Put money in people's hands so they can afford to buy food, the bank says.

In a sense then, the ADB recommends that governments act to counter the perverse effects of the present capitalistic system that produces a steadily widening income gap.

 
A symptom of the ills of the global capitalistic system

This is not to say that market capitalism is bad. When functioning efficiently, price signals will guide producers to fill the gaps, though there will be some lag time. Unfortunately, we too often look no further than efficiency and forget that market capitalism has no inherent morality. It does not factor human suffering into its economic equations.

In any case, markets can never be perfectly efficient. People will exploit their starting advantages, e.g. access to power or inside information, to tilt the playing field to their advantage, just as oil-producing countries get together to flex their muscles over the oil price (though short of a world government, there is not a lot we can do about countering the OPEC cartel).

Hence, in the last few decades, the global system has tended towards a concentration of wealth among a few, while governments, especially since the Reagan and Thatcherite "revolutions", have tended to overlook their duty to compensate for capitalism's failings and sand off its sharp edges. Quite the reverse: progressive tax policies have been chipped away while many governments continue to pay insufficient attention to basic infrastructure and social services. The hubris from the West's victory over communism added to their blind faith in capitalism and consequent neglect of rising inequality. [1]

600 million of Asia's very poorest spend 40 per cent to 50 per cent of their income on food. Indeed, Mr Rajat Nag, the Asian Development Bank's managing director-general, says food spending now accounts for 80 per cent of income for some of the poor in South Asia.

-- Straits Times, 25 April 2008, Rising prices'
whirlwind effect, by Tion Kwa

The food price crisis is thus a reminder that we need to pay attention. How long more are we going to let the income gap widen? Until people starve? Why is money sitting in hedge funds instead of being in the pockets of the hungry? Can the drive to ever freer world trade be sustained when shortages rock one country after another leading to politically expedient market closures? Perhaps it is time for some soul-searching about the global economic order and the question of equity.

© Yawning Bread