A soaring food price fear

The dire US drought has seen prices in key food staples reach the record levels of the 2007-08 food crisis. Will it again be the catalyst for global unrest, and how will central banks manage any resultant inflation?

Markets are bracing for a surge in global political unrest, as the worst US drought in half a century sent corn and soybean prices soaring to record highs overnight.

The combination of scorching temperatures and a lack of rain has now pushed corn and soybean prices above the peaks they reached during the 2007-08 food crisis. Overnight, the corn futures price climbed above $US8 a bushel for the first time, while that of soybeans hit a record $US17.12 a bushel.

Although the wheat price has not yet hit record highs, it has jumped more than 50 per cent in the past five weeks, and is now above the level it hit after Russia’s crop failure in 2010, which prompted Moscow to impose a ban on grain exports.

Grain traders have been anxiously monitoring the effect of the drought, which is the worst since 1956 in terms of the areas affected. In its weekly crop report, the US government said that only 31 per cent of the corn crop was in "good to excellent condition”, a sharp drop from its estimate of 40 per cent last week. For soybeans, the estimate dropped to 34 per cent from 40 per cent.

But the devastating US drought will have massive global effects. The United States is the world’s largest exporter of corn, soybeans and wheat – supplying around one-third of these staple grains traded on the global market.

Already, some analysts are warning that the world could be in for a period of intense social and political instability similar to that seen in 2007-08 when soaring food prices sparked riots in dozens of countries. They note that last year’s political instability in the Arab world was partly caused by surging grain prices.

The effect of rising grain prices is most pronounced in poor countries, where people can spend up to three-quarters of their income on food. Because food is such an important part of consumer spending, surging food prices are quickly reflected in a jump in official inflation figures.

Major emerging countries such as China, India and Brazil have been cutting interest rates recently in order to buffer their own economies from the drag on growth caused by the continuing European debt crisis and the anemic US recovery.

Analysts fret that faced with higher inflation, central banks in emerging countries might hold back from applying stimulus policies, and could even hike interest rates to control rising prices. This would deal a further blow to the moribund global economy.

In particular, they fear that surging soybean prices will quickly be reflected in higher Chinese inflation. Already this year soybean prices have climbed 40 per cent, creating a problem for China, by far the world’s largest importer of soybeans.

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