Analysis:
Rising food prices bring host of political risks
06 January, 2011 | By Peter Apps (Reuters)
--------------------------------------------------------------------------------
record high in December and could rise further on erratic global
weather patterns. For the first time they outstripped levels reached
in early 2008, when spiraling prices prompted riots in countries
including Haiti, Egypt and Cameroon and brought demands for
tighter commodity market regulation.
The potential humanitarian, political and business impact --
particularly in impoverished states where food makes up the largest
component of the inflation basket -- is already alarming
policymakers and senior officials.
"Food price increases impact the poor hardest as food is a higher
proportion of their incomes," said James Bond, chief operating
officer of the World Bank's political risk insurance arm the
Multilateral Investment Guarantee Agency (MIGA).
"It creates significant tension in poorer countries, exacerbates
standard of living disparities and is a major source of unrest."
The 2008 price spike came to an abrupt end in September that year
with the global crash that followed the demise of Lehman Brothers,
sucking borrowed money out of markets as lenders called in their
debts.
But right now, no one expects that to happen again.
So far, experts say weather-related supply shocks -- floods in
Australia, drought in Argentina, dry weather and fires in Russia and
potentially crop damaging frosts in Europe and North America --
were largely to blame. But they worry politics and markets could
soon take over to produce a vicious circle.
"The danger is that what happens now is that you get a second
shock as countries can respond by imposing export bans and
financial markets investors pile in for short-term investment, pushing
prices much higher, as they did in 2008," said Maximo Torero,
divisional director for markets, trade and institutions at Washington
DC's International Food Policy Research Institute (IFPRI).
Russia imposed export restrictions last year after fires and drought.
In 2008, IFPRI says at least 13 countries including Argentina,
Cambodia, Kazakhstan, China, Ethiopian, Malaysia and Zambia
imposed either export bans or taxes, further squeezing supply.
POLITICAL RISK INSURERS WATCH
Torero said reports of unrest could further fuel price rises, driving
speculative investment and promoting panic buying -- even if the
causes might often in reality be more complex.
He pointed to reported food riots last year in Mozambique as an
example, saying in reality they were as much about subsidy cuts as
supply issues.
"Clearly what is needed is to increase production through
appropriate investment in agriculture, to increase the information on
stocks around the world, strengthen the regulation of the futures
markets and to have safety net mechanisms to protect the poorest
consumers," he said.
Political risk insurers, who provide protection against dangers such
as confiscation or political violence, are watching closely -- although
they say there has not yet been any direct impact on premiums.
"The potential is there for food riots and also for governments to
take action such as embargos on food exports or nationalization of
assets involved in food production or storage in order to protect
their people -- not always necessarily for the sake of altruism but
often to preserve their position as governments in office," said a
senior underwriter in the London political risk insurance market.
The highest risks of farmland expropriation remain in Latin America,
insurers say -- particularly Venezuela, Bolivia and Ecuador -- but
this is more down to local political factors than rising prices. The
greatest impact of the recent rally could be on land deals in Africa,
some suggest.
RISK MITIGATION STRATEGIES
The 2008 spike produced a flurry of interest in farmland purchases
both from Western funds and richer emerging countries such as
China and Gulf states keen to preserve their supplies.
While some deals fell through after the crash, others are now
entering production. But they have proved controversial. Local
anger over the purchase of Madagascan farmland by South Korean
firm Daewoo was seen by some as a contributing factor in the
island's 2009 coup.
"The main risks will come where they are in an area where the
population is short of food themselves and the deal is seen as being
in some way inappropriately negotiated," said Jonathan Wood,
global issues analyst at Control Risks. "So many of these projects
are in East Africa: Ethiopia, Kenya, Tanzania. But a lot will depend
on the individual deal."
Some investors such as London-based funds Emergent Asset
Management and Chayton Capital say a key part of their strategy
has been to ensure such projects clearly benefit the local
community, for example through local milling.
"Smart investors don't own the land," said Bond at the World
Bank's MIGA. "They work with contract farmers and see the
domestic market as their first and most important market. It makes
sense from a risk mitigation strategy."
Courtesy
Rising food prices bring host of political risks
06 January, 2011 | By Peter Apps (Reuters)
--------------------------------------------------------------------------------
- LONDON (Reuters) -
Record food prices will hit
the world's poorest hardest,
raising the risk of riots,
export bans, foreign-owned
farmland expropriation and
further price spikes fueled
by short-term investors.
The UN Food and
record high in December and could rise further on erratic global
weather patterns. For the first time they outstripped levels reached
in early 2008, when spiraling prices prompted riots in countries
including Haiti, Egypt and Cameroon and brought demands for
tighter commodity market regulation.
The potential humanitarian, political and business impact --
particularly in impoverished states where food makes up the largest
component of the inflation basket -- is already alarming
policymakers and senior officials.
"Food price increases impact the poor hardest as food is a higher
proportion of their incomes," said James Bond, chief operating
officer of the World Bank's political risk insurance arm the
Multilateral Investment Guarantee Agency (MIGA).
"It creates significant tension in poorer countries, exacerbates
standard of living disparities and is a major source of unrest."
The 2008 price spike came to an abrupt end in September that year
with the global crash that followed the demise of Lehman Brothers,
sucking borrowed money out of markets as lenders called in their
debts.
But right now, no one expects that to happen again.
So far, experts say weather-related supply shocks -- floods in
Australia, drought in Argentina, dry weather and fires in Russia and
potentially crop damaging frosts in Europe and North America --
were largely to blame. But they worry politics and markets could
soon take over to produce a vicious circle.
"The danger is that what happens now is that you get a second
shock as countries can respond by imposing export bans and
financial markets investors pile in for short-term investment, pushing
prices much higher, as they did in 2008," said Maximo Torero,
divisional director for markets, trade and institutions at Washington
DC's International Food Policy Research Institute (IFPRI).
Russia imposed export restrictions last year after fires and drought.
In 2008, IFPRI says at least 13 countries including Argentina,
Cambodia, Kazakhstan, China, Ethiopian, Malaysia and Zambia
imposed either export bans or taxes, further squeezing supply.
POLITICAL RISK INSURERS WATCH
Torero said reports of unrest could further fuel price rises, driving
speculative investment and promoting panic buying -- even if the
causes might often in reality be more complex.
He pointed to reported food riots last year in Mozambique as an
example, saying in reality they were as much about subsidy cuts as
supply issues.
"Clearly what is needed is to increase production through
appropriate investment in agriculture, to increase the information on
stocks around the world, strengthen the regulation of the futures
markets and to have safety net mechanisms to protect the poorest
consumers," he said.
Political risk insurers, who provide protection against dangers such
as confiscation or political violence, are watching closely -- although
they say there has not yet been any direct impact on premiums.
"The potential is there for food riots and also for governments to
take action such as embargos on food exports or nationalization of
assets involved in food production or storage in order to protect
their people -- not always necessarily for the sake of altruism but
often to preserve their position as governments in office," said a
senior underwriter in the London political risk insurance market.
The highest risks of farmland expropriation remain in Latin America,
insurers say -- particularly Venezuela, Bolivia and Ecuador -- but
this is more down to local political factors than rising prices. The
greatest impact of the recent rally could be on land deals in Africa,
some suggest.
RISK MITIGATION STRATEGIES
The 2008 spike produced a flurry of interest in farmland purchases
both from Western funds and richer emerging countries such as
China and Gulf states keen to preserve their supplies.
While some deals fell through after the crash, others are now
entering production. But they have proved controversial. Local
anger over the purchase of Madagascan farmland by South Korean
firm Daewoo was seen by some as a contributing factor in the
island's 2009 coup.
"The main risks will come where they are in an area where the
population is short of food themselves and the deal is seen as being
in some way inappropriately negotiated," said Jonathan Wood,
global issues analyst at Control Risks. "So many of these projects
are in East Africa: Ethiopia, Kenya, Tanzania. But a lot will depend
on the individual deal."
Some investors such as London-based funds Emergent Asset
Management and Chayton Capital say a key part of their strategy
has been to ensure such projects clearly benefit the local
community, for example through local milling.
"Smart investors don't own the land," said Bond at the World
Bank's MIGA. "They work with contract farmers and see the
domestic market as their first and most important market. It makes
sense from a risk mitigation strategy."
Courtesy
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