With another food crisis is in the works, revolution becomes a likelihood in some parts of the world.
We would like to draw readers' attention to the fact that the FAO (Food and Agriculture Organization at the United Nations) Food Price Index hit a near-high in September. The cereals portion of the Index was 263, just a hair below the peak reached in April 2008, when food riots were sparked across the developing world.
Of all the food groups, cereals are particularly significant to the people of the world, primarily because of the many developing nations where cereal imports are critical for food security, and where most of the imports are consumed directly rather than being processed into further commercial foodstuffs as in the developed countries.
The availability and price of cereals is a matter of grave concern for many nations. They consume cereals as the basis of their diet. So while a spike in wheat prices will add only pennies to the cost of an American loaf of bread, most of which is comprised of manufacturing, transport, and marketing expenses, a spike in wheat prices can mean the difference between sufficiency and hunger for citizens of many countries in the Middle East, the Caribbean, East Asia, and Africa. As we saw during the Arab Spring, when food prices create social instability in geopolitically sensitive areas, the consequences can be severe for all members of the global community. We believe that the full ramifications of the Arab Spring have not yet been felt in the world and that they will be felt in many ways over coming years and decades.
Some serious research has been done on the correlation between food prices and social unrest. The New England Complex Systems Institute has published several reports (NECSI). Their data show clear correlations during periods of food shortage in 2008 and during the Arab Spring period in 2011. Alarmingly, today the current food crisis is at the same type of levels that led to widespread unrest in 2008 and 2011.
These studies clearly show that political instability results from food insecurity, regardless of the level of esteem the people hold for their government. In other words, if you're hungry, you're ready for revolt, no matter how much you say you trust your leaders.
Food Prices Tracked Political Unrest Closely...
...And May be Set to Do So Again
A number of factors intersect to render some nations and regions more vulnerable than others to social crisis driven by food price spikes. First is the level of import dependency and domestic production, influenced by the current drought. For example, many North African countries (including Egypt) rely heavily on wheat imports as the backbone of their food supply, importing 30 to 70 percent of their needs, and in addition are often challenged by water constraints.
Asia, Bangladesh, Indonesia, and the Philippines are similarly dependent on wheat and other imports, as is much of sub-Saharan Africa. South Africa is the largest corn producer on the continent, and its neighbors (Botswana, Namibia, and Swaziland) are all heavily import-dependent. Drought has driven yields down sharply in countries such as Lesotho, which under better circumstances are able to meet more of their own cereal needs.
When political unrest reaches a severely disruptive point, it puts production into a disastrous downward spiral, as in Mali, Yemen, and especially Syria. Many nations in the Caribbean and in Central America are similarly affected and similarly dependent. The effects of the 2007/2008 and 2011 crises persist also in that many poor citizens sold assets during the crisis and cut down expenditures on education and health, putting them in an even more vulnerable position for the present spike.
Unfortunately, besides a confluence of long-term dependency, drought, political turmoil, and reverberations of the last rounds of price spikes, there are other factors at work driving up cereal and soybean prices, as we observed in our discussion of the current drought in last week's letter. The U.S. still has ethanol production mandates in place which divert half of its corn production away from food use. The states of Georgia, New Mexico, Maryland, Delaware, North Carolina, and Arkansas have all petitioned the EPA for a suspension of the mandate. Not surprisingly, in the current divisive political climate, a decision on whether to grant that suspension has been put off until the week after the election.
Notably also, global waves of QE liquidity are pouring into the world's financial system from every central bank eager to boost its nation's flagging economy. And much of that freshly printed money is finding its way into commodity markets. This raises food prices both directly and indirectly; directly because cereals and soybeans are themselves the objects of financial speculation, but also indirectly through the volatility of hydrocarbon prices, which influence both the cost of food production itself and that of the ammonia-based nitrogen fertilizers on which the world food supply is dependent. Appreciating asset prices thus add another layer of instability.
Sadly, instability in certain parts of the world that is caused by food insecurity is often perceived to be geopolitically irrelevant to many in the developed world. However, a few critical hotspots, particularly in the Middle East have shown that food insecurity is far from being simply an occasion for the deployment of short-term international aid. Food is necessary for life and people will risk their lives to procure a stable supply. As investors, we should be alert to the probability that turmoil may develop in the Middle East if food is once again in short supply during 2013.