Could we really run out of food?

By Jon Markman

As if a bear market, credit crunch, energy crisis and city financing emergency were not enough for one year, experts say the world is now facing down the barrel of the worst catastrophe of all: famine.

The very idea that the modern world could run out of food seems ludicrous, but that is the flip side, or cause, of the tremendous recent increase in the cost of raw wheat, corn, rice, oats and soybeans. Food prices are not escalating because speculators have run them up for sport and profit, but because accelerating demand in developing nations, biofuel production and poor harvests in some areas have made basic foodstuffs truly scarce.

In energy circles, folks who warn about the beginning of the end of cheap fossil fuels talk about "peak oil" as a point we have dangerously and expensively crossed. Likewise, you can now add "peak wheat" to your political and investment lexicon. And it's a lot worse.

Food fighting

One can always move closer to work to cut down on gasoline. But be forced to eat less toast, beer and steak? Them's fightin' words.

Wheat futures prices have tripled since 2004, corn prices have almost tripled since 2005, and soybeans have tripled since 2006. Meanwhile, crude oil is up merely 60% in the past three years, which makes it seem very bearable in comparison. U.S. stock prices have barely eked out a 10% advance since 2005, underscoring the diminishment of our buying power. A large pepperoni pizza these days costs about as much as a share of Citigroup (C, news, msgs). Citigroup finished Wednesday at $22.15.

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This is no joke, already, in Asia. Rice prices surged to a 20-year high earlier this year -- more than $18 per hundred pounds -- as countries that have the most are hoarding it for their own people. Vietnam, India and Egypt have restricted exports to keep local markets stocked. Thai, Philippine and Indonesian officials are warning of civil unrest if the flow of rice does not increase.

Russia, Ukraine and Kazakhstan in have restricted wheat exports as well, slapping on big tariffs to make sure shelves are stocked in their homelands amid soaring prices. A major Russian grains-company chief told Reuters that his country "is in a condition that has never happened before." Higher prices are not meeting any resistance from desperate buyers.

Most unusual about this phenomenon, according to BMO Financial Group strategist Don Coxe, is that until now, food crises in world history were regional concerns that arose from crop failures, war or pests. Once global trade of grains got going in the 19th century in a major way, food shortages in one country were ameliorated by imports, he said. What's happening now is a lack of supply everywhere at once.

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Culprits abound, but chief among them is urbanization, which has cut the amount of acreage devoted to farming. The United Nations reports that the total area devoted to crops worldwide had risen by 0.3% annually since 1961, to 3.8 billion acres through the latest survey. But the growth has stalled to 0.1% annually in the past decade. Unlike energy, you can't drill deeper in the ocean or under Arctic tundra for more food.

Also, surging income growth among emerging middle classes in China, India, Southeast Asia and South America has boosted demand for meat protein, and feed for new Asian cattle ranches and pig farms is putting intense pressure on the world's corn supply. Of course, the weather plays a role, too. A terrible drought in the breadbasket of Australia over the past two years has combined with bad harvests in Argentina and Brazil to create some of today's shortfall.

Empty global cupboards

Shortages are real. The Financial Times reports that rice stocks have fallen this year to about 70 million tons, the lowest level in 25 years and less than half the total held in global inventories in 2000. Wheat inventories, called "carry-overs" in the trade, are at 30-year lows even though world wheat production was actually up 1% last year. In the past year, reports show, wheat inventories in the European Union have plunged to 1 million tons from 14 million tons.

A leading Canadian fertilizer executive told analysts recently that according to his company's calculations, global grain reserves are "precarious," at just 1.7 months of consumption, down from 3.5 months of reserves as recently as 2000.

Continued: Retailers absorbing much of the bill

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