Aug 23 2012
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A bigger food crisis
The current drought in the United States is not the only food crisis we need to worry about. Behind the shortage of 2.2-billion bushels of corn is a much bigger food crisis waiting for the world, which has been pushed back as governments fight their debt crisis, anaemic growth and rising unemployment.
But this food crisis is unlikely to go away any time soon, affecting every country, but it will be especially severe on middle- to low-income countries with large populations - like Egypt.
"We are five years into a severe global food crisis that is very unlikely to go away," said Jeremy Grantham, the much respected Wall Street analyst and co-founder of GMO Capital. "It will threaten poor countries with increased malnutrition and starvation and even collapse. Resource squabbles and waves of food-induced migration will threaten global stability and global growth. This threat is badly underestimated by almost everybody and all institutions with the possible exception of some military establishments."
Mr. Grantham believes we are in the midst of structural changes in resource prices which are finally on the way up after steadily falling for close to 100 years.
While food makes up 10% or 12% of the household budgets of developed countries, it makes up 40% of households in places like Egypt and other North African countries.
"Global grain prices almost tripled in the last 10 years. If they were to double in the next 20 years it would be painful indeed even for rich countries, but simple arithmetic will show you how impossible the situation becomes for those poorer countries that start out with a 40% share of food in their budget," Mr. Grantham argues. "It is not even clear that the existing 40% share can be easily tolerated: grain prices are thought to have already played a substantial role in the Arab Spring, particularly in Egypt. Any material increases in real grain prices from here on are unlikely to be easily manageable."
The concern is real although the GMO executive peers a bit too far in his crystal ball to paint a truly horrific picture for the Egyptian economy: While the country currently feeds 55 million of its 84 million people with its own food, by 2050 that figure could jump to 84 million, which would make a huge strain on its very finite food resources, notes Mr. Grantham.
The country already has a USD25-billion trade deficit, much of it importing food such as wheat, and that suggests the deficit will balloon over time on rising food consumption.
If this sounds hysterical on the part of a sober analyst - look no further than Yemen where the catastrophe is already playing out.
The United Nations Office for the Coordination of Humanitarian Affairs says that the number of malnourished children under five has increased by 83% to reach 967,000 children, and the number of severely food-insecure Yemenis has more than doubled over the past two years.
"Ten million Yemenis, or 44.5% of the population, are now food-insecure, of whom five million are severely affected and need immediate assistance," the agency noted in an August 17 report. "These are among the highest levels in the world today."
That's exactly Mr. Grantham's point: we seem to be hurtling towards a future where unsustainable consumption could leave us with depleted resources and extra mouths to feed.
"If you realize that several countries are in this position and quite a few are worse off, then you realize how perilously thin the veneer of global stability is," said Mr. Grantham. "The global food crisis is not just a prospect for the distant future, it seems to be well on its way already and better weather in the future would seem unlikely to buy it more than a year or two of reprieve."
"But this is where Mr. Market intrudes: long before an extra 60% in food supply is reached, rising prices will have made food too expensive for hundreds of millions," notes the GMO executive.
Mr. Grantham is not the only analyst highlighting a bigger food crisis.
David Rosenberg, a prominent Wall Street observer, says the food crisis is reaching epidemic proportions.
"Global food price inflation is bound to severely squeeze consumer spending everywhere," said Rosenberg.
This could upset a fragile global economic recovery. Bill Witherell, Chief Global Economist at Cumberland Advisors argues that countries that have felt able to move to significantly eased monetary policies to encourage growth, including many emerging markets, may soon be under pressure to reverse course as higher food prices increase the risk of more general inflation.
"On balance, as investment managers, we see the sharp increases in global food prices that have already begun and the potential for a global food crisis as a serious economic and geopolitical risk that capital markets appear to be underestimating," noted Mr. Witherell.
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