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Poor feel the pain as food and oil prices surge

Rising food prices will push millions of poor people deeper into poverty. Soaring oil prices are partly to blame

IN THE nine months since June last year, as many as 44 million people in developing countries have fallen into "extreme poverty", the World Bank says - and all because of a sharp rise in food prices.

Soaring global prices for wheat, maize, sugar and edible oil - the staples of the world's diet - are wreaking havoc. It's a trend that threatens "tens of millions of poor people around the world", says Bank president Robert Zoellick, "pushing people into poverty, and putting stress on the most vulnerable".

And as the price of crude oil continues to rise, so too will the cost of feeding a family. It's a double-whammy for many of the world's most desperate people living in countries that depend on either imported oil or food, often both. Hopes for democracy and freedom may have been behind the upheavals in North Africa, but hunger and poverty offer another deep source of unrest.

The crude market is partly to blame. As crude soars, so, eventually does the price of food. Zoellick said the oil-linked jump in food prices in Egypt and Tunisia was an "aggravating factor" in the unrest in both countries. And the Middle East's turmoil unleashed the oil market's bulls, pushing oil futures up further. This could have other consequences, including encouraging increased biofuel production, removing valuable farmland from the food-production chain. Some believe this vicious circle can be halted only by tackling oil demand.

The statistics are startling. In its most recent Food Price Watch report, the Bank says its food-price index increased by 15% between October 2010 and January 2011 (see Figure 1). And over the past year, food prices have risen by almost a third, the Bank says, with the cost of maize jumping by 73% between June 2010 and January 2011. Some of the poorest countries have been the hardest hit. Kyrgyzstan and Bangladesh, for example, have seen their wheat prices increase by 54% and 45% respectively.

Indeed, more than a third of countries in eastern Europe and Central Asia suffered double-digit food inflation last year. Only government intervention, through subsidies and food-tax relief, can insulate people from this. But such a strategy simply shifts the pain elsewhere, causing what the Bank calls "macro vulnerabilities" - rising sovereign debt, for example, depletion of currency reserves, or draining of public finances.

It could grow worse. At the beginning of March, the UN said further oil-price spikes and stockpiling of food by importers worried about yet more inflation would hit already-volatile cereal markets hard. And price volatility is part of the problem. "High prices we get used to," says Jon Clark, director of Oil & Gas mergers and acquisitions at Ernst & Young, an accountancy. But rapid changes in the market make it "very difficult for people to live".

The situation is also complicated by differences in the global market. Rising wheat prices, for example, pose bigger problems for the developing world, says Clark, where people are more likely to consume pure cereal products, such as maize and wheat. But in the developed world, wheat is consumed primarily after being refined, in the form of bread. So sharp price rises in Asia don't necessarily yield the same surge in prices for bread in Europe.

For the developed world, less exposed to fluctuations in the cost of raw materials, prices are "softened". But that's not the case for developing countries. Morocco, for example, will double its spending on food and fuel subsidies this fiscal year, the Bank says.

Higher oil prices also tend to push up natural gas prices, which in much of the world are indexed against crude. And, points out Stewart Johnston, an analyst from IHS Cera, stronger gas prices would be another source of upwards pressure on food levels, because that fuel is a feedstock for fertiliser production. Strong gas buying from Japan - which many analysts expect will be one consequence of the country's unfolding nuclear scare - could be a blow to food buyers, too. No wonder wily rulers, such as Saudi Arabia's King Abdullah, have tried to stave off protests by offering benefits, including food subsidies.

Yet some economists pin part of the blame on food and fuel subsidies prevalent through the developing world. These subsidies artificially stimulate demand by insulating consumers from price rises, runs this argument. Indeed, the International Energy Agency said in November 2010 that fossil-fuel subsidies amounted to $312bn in 2009 and that cutting these subsidies would boost the global economy, energy security and environmental conditions.

Subsidies: a political minefield

But any search for price stability that ended these kinds of subsidies could be a political minefield, says IHS Cera's Johnston. Governments may find themselves "caught between a rock and a hard place" in terms of the subsidies for food and fuel they decide to offer. It would be a "brave government", says Johnston, "that reduces food or fuel subsidies in the Mideast Gulf at the moment."

The same applies elsewhere. Egypt's bread subsidy, for example, reaches 85% of the population and cutting it would have a huge impact on a populace already under strain after weeks of turmoil. Try explaining to an impoverished North African that, to help stabilise global food prices, economists think he ought to pay the same price for food as someone in North Dakota.

And subsidies aren't the only area in which governments have to pit fuel against food. Rising oil prices also encourage biofuel production, points out Shruti Mehrotra, senior climate campaigner at Global Witness, an environmental think-tank. But biofuels have to be grown - often in fields that could be used for crops.

It's more complicated, too, because of climate change, which is partly caused by burning fossil fuels. Ecological changes, or disasters that some attribute to the shifting climate - floods or crop failures through lack of rain, for example - add to price volatility in food markets.

And alongside rising fuel costs, affecting shipping of produce and even the packaging of foodstuffs, pricier staples are a significant source of inflation. That's an economic force that affects even the biggest developing countries, such as China and India, whose burgeoning populations demand ever-greater volumes of food.

"The same countries that are going to have food-price problems will also have oil-price problems," says Mehrotra. "While oil will have a deep economic impact," she says, "it's rising food prices that will lead to an increased risk of political instability."

For Mehrotra, the solution is relatively straightforward: diversify into renewable energy and take the sting out of rising fossil-fuel prices - and let farmers grow food, not fuel. "Energy demand patterns have helped to exacerbate climate change," she says. "Having a climate policy to deal with emissions is vital."

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