London–Record food prices will hit the world's poorest hardest, raising the risk of riots, export bans, foreign-owned farmland expropriation and further price spikes fuelled by short-term investors.
The UN Food and Agriculture Organization said on Wednesday food prices hit a record high in December and could rise further on erratic global weather patterns. For the first time they outstripped levels reached in early 2008, when spiraling prices prompted riots in countries including Haiti, Egypt and Cameroon and brought demands for tighter commodity market regulation.
The potential humanitarian, political and business impact — particularly in impoverished states where food makes up the largest component of the inflation basket — is already alarming policymakers and senior officials.
"Food price increases impact the poor hardest as food is a higher proportion of their incomes," said James Bond, chief operating officer of the World Bank's political risk insurance arm the Multilateral Investment Guarantee Agency (MIGA).
"It creates significant tension in poorer countries, exacerbates standard of living disparities and is a major source of unrest."
The 2008 price spike came to an abrupt end in September that year with the global crash that followed the demise of Lehman Brothers, sucking borrowed money out of markets as lenders called in their debts.
But right now, no one expects that to happen again.
So far, experts say weather-related supply shocks — floods in Australia, drought in Argentina, dry weather and fires in Russia and potentially crop damaging frosts in Europe and North America — were largely to blame. But they worry politics and markets could soon take over to produce a vicious circle.
"The danger is that what happens now is that you get a second shock as countries can respond by imposing export bans and financial markets investors pile in for short-term investment, pushing prices much higher, as they did in 2008," said Maximo Torero, divisional director for markets, trade and institutions at Washington DC's International Food Policy Research Institute (IFPRI).
Russia imposed export restrictions last year after fires and drought. In 2008, IFPRI says at least 13 countries including Argentina, Cambodia, Kazakhstan, China, Ethiopian, Malaysia and Zambia imposed either export bans or taxes, further squeezing supply.
Torero said reports of unrest could further fuel price rises, driving speculative investment and promoting panic buying — even if the causes might often in reality be more complex.
He pointed to reported food riots last year in Mozambique as an example, saying in reality they were as much about subsidy cuts as supply issues.
"Clearly what is needed is to increase production through appropriate investment in agriculture, to increase the information on stocks around the world, strengthen the regulation of the futures markets and to have safety net mechanisms to protect the poorest consumers," he said.
Political risk insurers, who provide protection against dangers such as confiscation or political violence, are watching closely — although they say there has not yet been any direct impact on premiums.
"The potential is there for food riots and also for governments to take action such as embargos on food exports or nationalization of assets involved in food production or storage in order to protect their people — not always necessarily for the sake of altruism but often to preserve their position as governments in office," said a senior underwriter in the London political risk insurance market.
The highest risks of farmland expropriation remain in Latin America, insurers say — particularly Venezuela, Bolivia and Ecuador — but this is more down to local political factors than rising prices. The greatest impact of the recent rally could be on land deals in Africa, some suggest.
The 2008 spike produced a flurry of interest in farmland purchases both from Western funds and richer emerging countries such as China and Gulf states keen to preserve their supplies.
While some deals fell through after the crash, others are now entering production. But they have proved controversial. Local anger over the purchase of Madagascan farmland by South Korean firm Daewoo was seen by some as a contributing factor in the island's 2009 coup.
"The main risks will come where they are in an area where the population is short of food themselves and the deal is seen as being in some way inappropriately negotiated," said Jonathan Wood, global issues analyst at Control Risks. "So many of these projects are in East Africa: Ethiopia, Kenya, Tanzania. But a lot will depend on the individual deal."
Some investors such as London-based funds Emergent Asset Management and Chayton Capital say a key part of their strategy has been to ensure such projects clearly benefit the local community, for example through local milling.
"Smart investors don't own the land," said Bond at the World Bank's MIGA. "They work with contract farmers and see the domestic market as their first and most important market. It makes sense from a risk mitigation strategy."