Food crisis looms as commodity prices hit fresh highs

As 2011 begins in earnest, the threat of a global food crisis triggered by rising commodity prices and shrinking supplies seems more imminent than ever. Last year brought devastating drought and fires in the fertile, wheat-growing plains of Russia, flooding in Pakistan and a brutal spell of drought in Australia, and 2011 could be just as volatile.

Combined with the rising cost of fuel and high levels of investor demand for grain futures and other solid assets, many saw the potential for a developing and dangerous situation. Now, with much of the Australian state of Queensland underwater, those fears are being realized. The floods damaged the country's supply of coal, cotton and wheat, among other things, and affected a total of nearly 200,000 people.

Some local officials are saying the total bill for the floods could exceed AU$2 billion, though no one knows for sure what the final tally will be.

The United Nations' Food and Agriculture Organization is now saying that with all these factors aligning, food could become too expensive for many impoverished laborers and farmers in the developing world, leading to potential civil unrest. The pinch is also being felt in developed economies, where multinational food corporations are raising prices on staples that employ wheat, corn, sugar and soy in their creation.

The FAO keeps a food index, which measures the price of a basket of staple foods including wheat, corn, rice, sugar, meat and dairy products. That index is now at its highest level since 1990, when it was first created – higher even than during the 2007-2008 food crisis that led to riots around the developing world.

If there's one silver lining, it's that rice – a staple across much of Asia and Latin America, and a vitally important crop for delivering cheap, regular nutrition – has lagged behind wheat and corn in price, which have experienced more supply shocks in the past year. Still, the FAO projects that much of sub-Saharan Africa, as well as a handful of Asian nations like Pakistan and Mongolia, will require food assistance in the coming year.

Cereal production is set to deteriorate by about 1.5 percent in the next year, but the global population will continue to climb. 

"Overall, in order to meet trend-based utilization requirements for 2011/12 and avoid a further drawdown of carryover stocks total cereal production in 2011 would need to increase by a minimum of 2 percent with larger increases required for wheat and maize in particular," the FAO wrote in a December 4 report.

Weather is playing a major role in this situation, though explanations differ depending on both political and scientific interpretations. What no one can deny is that the La Niña weather pattern is having a serious effect in increasing the volatility of meteorological conditions around the globe. Russia's drought, Pakistan's flooding and Australia's whipsaw shift between the two have all blamed on the phenomenon or its counterpart, El Niño.

As with all complex systems, the effects are varied – Australian farmers suffer from torrential downpours, but Zimbabwe, Brazil and Indonesia may all benefit from stronger rains. The increased volatility of the weather means that grain prices will be less predictable, however.

It's also important to keep an eye on energy futures, particularly crude oil futures. The rising strength of the global economic recovery, coupled with the stunning growth of emerging markets like Brazil and China, means that demand for gasoline and fuel oil will continue to surge. The motorization of the Chinese economy, in particular, will take a toll on global gasoline supplies as more of the nation's billion-plus citizens buy cars. 

With modern agriculture heavily dependent on petroleum and its distillates to provide fuel and fertilizer, rising crude prices will inevitably push up the cost of producing all the key crops needed to feed a rising global population.