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Global Food Prices Create Instability

posted on February 18, 2011

Since consumer spending accounts for more than 70 percent of all economic activity, analysts monitor consumer behavior closely. This week, the government reported surprisingly weak retail sales numbers.

According to the Commerce Department, retail sales rose for the seventh straight month in January, but the 0.3 percent increase was the smallest since June, and only about half of what economists predicted.

About one-third of the gain was attributed to higher fuel prices, as retail gasoline sales climbed 1.4 percent. Crude oil prices exceeded $85 per barrel this week after violent protests in Iran raised concerns that supplies could be disrupted from one of world's largest producers.

And the Labor Department reports its Consumer Price Index rose 0.4 percent last month. Stripping out the volatile food and energy sectors, so called core inflation rose 0.2 percent in the largest monthly increase in more than a year.

Food prices were up 0.5 percent in January. That's their largest increase in more than two years, and it prompted a key agency working to spur development in the third world to issue a distress call.

Prices for food around the world have hit what an international agency dedicated to fighting poverty calls "dangerous levels," prompting concern of political instability.

A study from the World Bank shows developing countries, where people spend as much of their income solely on food, have been hit the hardest.

Globally, food prices have jumped 29 percent in the past year, and now are just below the all-time high set in 2008.

Ngozi Okonjo-Iweala, Managing Director, World Bank Group "According to our research at the World Bank, the recent food price hikes have thrown another 44 million people into extreme poverty. I feel we've now reached a food security danger zone."

Volatile trading in commodities drove the World Bank's "Food Price Index" to increase 15 percent from October to January. During that time, global corn prices doubled on strong demand from developing countries and the biofuels industry.

Also contributing to the rise in commodities are historically low supplies of corn, which push prices higher and leave little room for crop adversity in the coming growing season.

Global prices for oils and fats rose 22 percent, while wheat and sugar increased 20 percent in that same October to January time frame.

In the United States and other industrialized countries, where raw ingredients account for just a fraction of total food costs, consumers are more insulated from sharp food price increases. But that is definitely not the case for people living in poorer, developing nations, where people feel the pinch of price increases much more acutely.

In Kyrgyzstan, between June and December wheat prices skyrocketed 54 percent. In Bangladesh, prices went up nearly 50 percent.

High food prices, of course, were blamed, in large part for social upheaval and subsequent regime changes in countries like Egypt and Tunisia.

China also is dealing with high inflation and even higher food costs amidst tight supplies and strong demand.

Key wheat producing regions are in the middle of a drought and the heart of China's wheat belt has seen virtually no rain since October, driving fears of a short crop.

U.S. cotton farmers, meanwhile, are seeing prices they could only have dreamt about a year ago.

Now clothing manufacturers are looking to pass along costs to the consumer, reversing a decade-long trend of fading prices.

Cotton surpassed the $200 mark this week prompting clothing companies to forecast a 10 percent increase in the next few months.


Tags: agriculture banks economy food news poverty