Another perfect storm brewing?

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International food prices remained relatively low for many years. By 2007 it was clear that different factors were influencing the demand for food products. Fast economic growth in developing countries resulted in a sharp increase in the demand for especially protein foods.

Protein demand increased the demand for grain as animal feed. At the same time, the demand for grain as feedstock for fuel production increased sharply. Prices of grains and livestock products rose on international markets. Then the very fine balance between grain supply and demand was destroyed when crops failed in some important grain exporting countries like Kazakhstan.

The first storm
By the second quarter of 2008 various commentators were referring to a ‘brave new world’ where prices would never again decrease to the pre-2007 levels. Then a different type of storm hit. Bankers in developed countries used the property boom as a basis for the development of various trading instruments. People were encouraged to borrow money on the book value of their properties. These loans were then combined and traded between banks.

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Banks put future debt repayments into ‘securities’ and traded these. When the US economy slowed down and people started to default on their housing payments, the value of these securities fell. The banking system in the developed world collapsed and the rest of the global economy followed, resulting in world food prices dropping to a new low. Although the global economy has recovered, global growth remains slow.

The next storm
High food prices in 2007 and 2008 were caused by a combination of fundamental drivers of demand and sudden supply side shocks. The same factors are still active. Global population growth and urbanisation continues. Economic growth has slowed down in developed countries, but remains robust in developing countries and the demand for food here continues.

As in 2007 and 2008, external shocks unbalanced a supply/demand situation that was already in a fine balance. Bad weather in various areas had a negative impact on production and resulted in a sharp increase in food prices. The FAO food price index increased by 5,9% from June to July and the cereals index by 17,1%, the sharpest month to month increase since November 2009.

Healthy global supplies of wheat and rice, and oil prices that are lower than in 2008, may limit the increase in food prices. In 2008, many countries instituted programmes to ensure local food security by limiting exports either directly or with the use of export tariffs. This is once again a possibility and officials at international organisations are already warning against it.

Implications for South Africa
On a national level it’s clear that food security can’t be taken for granted. Politicians can’t expect to use the farmer as a scapegoat for various political issues and still expect them to produce. Land reform endangers food production, and maybe it’s time government provided unused tribal and state-owned land for commercial farmers to produce food.

On an individual level, livestock farmers must ensure they’re able to obtain grain for feeding their livestock in the coming year.
Grain farmers will also have to ensure that they, and not the grain traders, get the major share of the higher prices. Grain producers and users must realise that the Safex grain exchange offers opportunities for hedging against sudden price fluctuations.

For instance, currently yellow maize for December delivery sells at R2 850 on Safex. A few months ago these contracts still traded at R1 900. Ignore Safex at your peril. On the other hand, those who use Safex to speculate usually get their fingers burnt.

Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and don’t reflect MPO policy.
Contact Dr Coetzee at
[email protected]. Please state ‘Global farming’ in the subject line.