What You Need to Know About Food Prices Before They Cause Another Meltdown

By
Photo: iStockPhoto

Ignoring Nouriel Roubini never got world economies very far. The NYU economist, who predicted the last U.S. financial crisis, is now saying that rising food and energy prices might cause the next one. "Surging food and energy costs are taking emerging-market inflation that’s serious enough to topple governments. Hosni Mubarak over in Egypt can attest to that," says Bloomberg, paraphrasing Roubini's argument. (Rising food prices were part of the protesters' complaints from Tunis to Cairo.) The U.S. faces a small rise in consumer prices as companies pass along higher food and energy costs to consumers. Demand for corn pushed our supplies to their lowest point in fifteen years. But Americans spend less of their income on food, so it's poorer countries that are harder hit. Global wheat prices more than doubled since last year. The World Bank, whose food price index went up 29 percent from last year and 15 percent since just October, says prices have pushed 44 million people into extreme poverty since June. The bank warns that these soaring costs could spur fresh unrest in the already-roiling Arab world. You know, that place where our fossil fuels comes from.

But why are food prices going bananas? U.N. food economist Abdolreza Abbassian told NPR's Planet Money that skyrocketing costs were due to a confluence of factors, including increased demand for biofuels (like ethanol, which is made from corn), demand from the developing world to feed livestock, as well as disappearing stockpiles, and speculation. World Trade Organization rules have forced the U.S. and Europe to give up subsidies that used to lead to vast reserves of corn and wheat. And bigger stockpiles meant food supply remained relatively constant. In terms of speculation, NPR says, "The volatility created by declining stocks is in turn compounded by speculation — traders betting on the rise or fall of prices."

Consider this an early head start on the 2011 equivalent of understanding credit default swaps.

Food, Energy Push Up Consumer Prices [WSJ]
Why Are Food Prices Going Crazy? [Planet Money/NPR]
Rising food prices may spur Arab unrest, warns World Bank [Arabian Business]
Roubini’s Next Crisis Is Scary Food for Thought [Bloomberg]