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World Food Prices Rising

When this year's grain harvest begins in May, world grain stocks
will be down to 59 days of consumption--the lowest level in 30
years. The last time stocks were this low, in 1972-74, wheat and
rice prices doubled. A politics of scarcity emerged with exporting
countries, such as the United States, restricting exports and
using food for political leverage. Hundreds of thousands of
people in food-short countries, including Ethiopia and
Bangladesh, died of hunger.

Now, a generation later, a similar scenario is unfolding, but for
different reasons. After nearly tripling from 1950 to 1996, growth
in the world grain harvest came to a halt. In each of the last four
years world grain production has fallen short of consumption,
forcing a drawdown of stocks. During this period, expanding
deserts, falling water tables, crop-withering temperatures, and
other environmental trends have largely offset the positive
contributions of advancing technology and additional investment
in agriculture.

Prices of basic food and feed commodities are climbing. Wheat
futures for May 2004 that traded as low as $2.90 a bushel within
the last year on the Chicago Board of Trade have recently topped
$4 a bushel, a climb of 38 percent. A similar calculation shows
the price of corn up by 36 percent, rice up 39 percent, and
soybeans doubling from just over $5 per bushel to over $10 a
bushel. Rises in the price of wheat and rice (the world's two
basic food staples) and corn and soybeans (the principal
feedstuffs) are contributing to higher food prices worldwide,
including in China and the United States, the largest food

In China, where grain prices are 30 percent above those of a
year ago, the National Bureau of Statistics reports that retail food
prices in March were 7.9 percent higher than in March 2003. The
price of vegetable oil is up by 26 percent, meat by 15 percent,
and eggs by 19 percent.

All countries are affected by the rising world price of basic food
commodities. The American Farm Bureau marketbasket survey,
which monitors U.S. retail prices of 16 basic food products in 32
states, shows a 10.5 percent rise in food prices during the first
quarter of 2004 over the like period in 2003.

Price rises range from a 2 percent rise in the price of milk to a
29-percent rise for eggs. The price of vegetable oil, up 23
percent, is beginning to reflect the doubling of soybean prices.
Meat prices are up across the board. A pound of ground chuck
climbed from $2.10 a year ago to $2.48, up 18 percent. Whole
fryers were also up 18 percent. Pork chops were up 10 percent.
Bread and potatoes were up 4 and 3 percent, respectively. (See

Still higher food prices are likely in the second quarter as
soybeans have recently hit 15-year highs and wheat and corn
7-year highs. Prices of livestock products that require large
amounts of grain are particularly sensitive to higher grain prices.
By contrast, bread prices do not usually rise much because
wheat typically accounts for less than one-tenth the cost of a loaf
of bread. Even a doubling of wheat prices would not greatly
increase bread prices.

Food prices are rising almost everywhere. In Russia, bread
shortages pushed the price of bread in February up 38 percent
compared with February 2003. This so alarmed the government
that it restricted wheat exports by imposing an export tax of 35
euros per ton.

In South Africa, corn futures prices have climbed in early 2004.
The price of white maize, the principal food staple, rose by more
than half between December 2003 and January 2004. Yellow
maize, used mostly for livestock feed, climbed by 30 percent
during the same period. Higher prices reflect sagging production
in the face of soaring demand as the world continues to add
more than 70 million people a year and as incomes rise,
enabling more of the world's people to consume grain-based
livestock and poultry products.

Growth in world grain production is lagging behind the growth in
demand largely because environmental trends, such as
spreading deserts, falling water tables, and rising temperatures,
are shrinking harvests in many countries. Consider, for example,
Kazakhstan, the former Soviet Republic that was the site of the
Virgin Lands Project launched in the 1950s. To expand grain
production, the Soviets plowed an area of virgin grasslands

that exceeded the wheat area of Australia and Canada
combined. It dramatically boosted production, but by 1980 soil
erosion was undermining productivity. During the 24 years since
then, half the country's grainland area has been abandoned.

During the late 1980s, Saudi Arabia launched an ambitious plan
to become self-sufficient in wheat. By tapping a deep
underground aquifer, the Saudi's raised grain output from
300,000 tons in 1980 to 5 million tons in 1994. Unfortunately the
aquifer could not sustain large-scale pumping and by 2003 the
wheat harvest had fallen to 2.2 million tons. Nearby Israel, faced
with dwindling water supplies, is no longer irrigating its small
remaining area of wheat, which means that dependence on
imported grain, already over 90 percent, will climb still higher.

China is the first major food producer to face reduced harvests
partly because of expanding deserts and aquifer depletion.
Some 24,000 Chinese villages have either been abandoned or
have had their farm economies seriously impaired by invading
deserts. In the arid northern half of the country where most of the
wheat is grown, tens of thousands of wells go dry each year.
These environmental trends, combined with weak grain prices
that lower planting incentives, shrank the harvest from its peak of
123 million tons in 1997 to 86 million tons in 2003, a drop of 30

Perhaps the most pervasive environmental trend that is
shrinking grain harvests today is rising temperature. When the
U.S. Department of Agriculture released its September 2003
monthly world crop estimates, it reduced the projected world
grain harvest by 35 million tons from its August estimate. This
drop, equal to half the U.S. wheat harvest, was due almost
entirely to the intense August heat wave in Europe, where
crop-withering temperatures shrank harvests from France in the
west through the Ukraine in the east.

In 2002 record heat and drought combined to shrink harvests in
both India and the United States. Record and near-record
temperatures in key food-producing countries accounted for a
large share of the record world grain shortfalls of 91 million tons
in 2002 and 105 million tons in 2003.

The question now is whether farmers can expand the grain
harvest this year enough to eliminate the huge deficit of last year.
Unfortunately there are no efforts underway that are sufficient to
reverse the expansion of deserts, the fall in water tables, or the
rise in temperatures that are shrinking harvests in key countries.
In the absence of such an effort, food prices are likely to continue

NOTE: The next Eco-Economy Update, scheduled for release on May 5 will analyze the harvest prospect for this year.

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