By Yuriy Humber and Luzi Ann Javier - Feb 24, 2011 /www.bloomberg.com
Governments need to overcome their suspicion of food companies to tackle record prices that are fueling global instability, Olam International Ltd. Chief Executive Officer Sunny Verghese said.
“They basically see us as people that are likely to take advantage of the situation,” said Verghese, whose Singapore- listed company is one of the world’s three biggest rice traders. Governments need to tap food-industry participants “who have more practical insights into what needs to be done.”
The unrest fueled by food inflation has toppled regimes in Egypt and Tunisia, pushed Libya toward civil war and may send the cost of staples such as wheat and corn higher still. The United Nations’ Food and Agricultural Organization in January warned against export bans, price controls and tariffs that it said disrupt global markets and act as a disincentive to farmers to plant more crops.
The World Bank said this month that 44 million people have been pushed into extreme poverty since June as food shortages sent a UN gauge of global prices to a record high.
The increases come less than three years since concerns about supplies of rice and other grains sent prices soaring, sparking riots in Latin America, Africa and Asia. After peaking at a record in June 2008, the FAO’s Food Price Index slumped 37 percent in eight months. The gauge hit a new high last month.
‘Warning Sign’
Governments should have taken 2008 “as a warning sign,” Verghese said in the Feb. 21 interview in Singapore. “Because the prices then dramatically eased off, everyone took their foot off the pedal.”
Global wheat production jumped 12 percent a year after the 2008 food crisis, before declining for two straight years, U.S. Department of Agriculture data show. Higher corn harvests since the last crisis haven’t met surging demand, putting the ratio of stockpiles to demand at a 37-year low of 15 percent this year.
Food inflation underlines “the structural nature of the problems in agriculture,” said Jeffrey Currie, London-based head of commodities research at Goldman Sachs Group Inc.
After the financial crisis spread across the world in October 2008, “we forgot about many of these problems over the following two years,” Currie said in a Bloomberg Television interview on Feb. 22.
Agricultural prices rallied before those of energy and other commodities because the recession had less impact on demand for foods, he said. “You eat about the same amount during a recession as you do during an expansion, which is why problems resurfaced here before elsewhere.”
Demand is accelerating because of urbanization, growing wealth in emerging markets and a shift in diet to more protein.
‘Upward Pressure’
“This can only go on for a period of time before you have an acreage battle with continuous upward pressure on agriculture prices,” Currie said at a conference in Hong Kong yesterday. “That’s pretty much where we are right now.”
Like in 2008, when former Brazilian President Luiz Inacio Lula da Silva said the “boundless greed of a few” had “spawned the anguish of entire peoples,” governments have focused on combating speculation, hoarding and profiteering by investors and food traders.
In India, where at least two national administrations were toppled by rising prices in the past two years, the government last month raided traders to stop hoarding. China last year doubled the entry barrier for bidders in state auctions to prevent speculators taking part.
France, as head of the Group of 20 nations this year, proposes “structural” measures to improve food security and reduce price swings, including more regulation of commodity markets and exchange of information on production and stocks, Agriculture Minister Bruno Le Maire said Feb. 4.
The Corn in Your Cornflakes
Cargill Inc., the grain distributor that’s the largest closely held company in the U.S., opposes France’s proposal to require deposits equal to part of the value of a trade because it would probably increase working-capital requirements, Roger Janson, Cargill Inc.’s head of European grain and oilseed trading, said earlier this month.
“It’s very important for companies like Cargill, which is a food company, that we can continue to use these futures markets to hedge our purchase of grain,” Janson said. The role of financial investors is often “seen through a negative lens,” while they are “very important” in providing liquidity in commodity markets, he said.
Food inflation by itself isn’t normally enough to spark riots, according to Evan Fraser and Andrew Rimas, authors of “Empires of Food: Feast and Famine and the Rise and Fall of Civilization.” In past riots, a key condition has been a sense of injustice or that profiteers are to blame.
Suffered in Silence
“Feelings of being cheated were more important than actual food prices,” the two wrote on the website of Foreign Affairs journal. “For the most part, the planet’s 700 million-900 million hungry people have suffered in silence.”
While tensions in the Middle East are likely to push agricultural prices higher, any short-term gains are no substitute for stability, Wilmar International Ltd. CEO Kuok Khoon Hong said in an interview yesterday.
“A peaceful environment is always good for business,” he said. Singapore-based Wilmar is the world’s biggest palm-oil processor.
Companies lack a forum where they can take part meaningfully in the decision-making process, Verghese said. Governments need to coordinate their response to tackle the supply constraints, rather than acting according to individual national interests, he said.
China and India
China and India between them control 65 percent of global rice reserves and 42 percent of wheat, according to USDA data.
“If India sees China building buffer stocks, they too want to build buffer stocks,” Verghese said. “If one country bans exports, every other country will want to ban exports.”
While the Group of 20 nations had “made a lot of great noises” about food security in their last three communiqués, the intent “tends to melt away by the time they all go back to their countries.”
With the global population expected to grow by 75 million people a year through 2050 and about 0.5 percent of the world’s arable land being lost annually due to salt and alkali leaks, leaching and over-tillage, time is running out to find a solution, Verghese said.
“Unless there is real commitment and real intent, and real global coordinated response, we are not going to solve this problem,” he said. “If we can fight a war over oil, we will fight bigger wars over food and water.”
To contact the reporter on this story: Luzi Ann Javier in Singapore at ljavier@bloomberg.net; Yuriy Humber in Singapore at yhumber@bloomberg.net
To contact the editors responsible for this story: Peter Hirschberg in Hong Kong at phirschberg@bloomberg.net; Andrew Hobbs in Sydney at ahobbs4@bloomberg.net / www.bloomberg.com
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