As food prices jump, UN group tries to avoid fuelling new crisis

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Two years after the food crisis, when soaring prices raised the spectre of mass hunger and starvation, food inflation has made a comeback.

For Potash Corp. of Saskatchewan Inc. , the world's biggest fertilizer maker, the price surge could not come at better time as it fights a $39-billion (U.S.) takeover bid from BHP Billiton Ltd. But in the developing world, the strain of higher food costs is beginning to show.

Last week's riots in Mozambique, which left at least 10 dead, were the first food riots since the crisis of 2007 and 2008, when violent unrest swept through Haiti, Egypt, Western Africa and several other poor regions. The Mozambique riots followed the government's decision to raise bread prices by 30 per cent, though rising water and electricity costs also helped to spark the uprising.

International food prices were up 5 per cent in August, the biggest one-month increase since last November, said the United Nations Food and Agriculture Organization in Rome, which has called a one-day meeting on Sept. 24 to examine the global markets for grains and rice. European wheat prices hit more than €231 ($308 Canadian) a tonne last week, which was close to the two-year high of €236 set in August, largely because drought has hammered the crop in Russia. Corn prices are at their highest level since mid-2009. Sugar and oilseed prices are also climbing.

The FAO, however, is being careful not to describe the galloping prices as a "crisis" or an "emergency," noting that its Food Price Index, while up substantially in recent months, is still 38 per cent below its peak in June, 2008. The organization's approach underscores how policy makers are trying not to set off the alarm, partly out of fear that the expectation of higher prices will drive hedge funds and other financial players into food futures, causing prices to rise even more, as happened in 2007-08

"The worst is behind us already," Abdolreza Abbassian, the FAO's senior grains economist, said in an interview Monday, noting that last week's extension of a wheat export ban in Russia caused barely a ripple in the markets.

"This is not a food crisis. If you say food 'crisis,' you get a food 'crisis' because the speculators pile in."

The global food markets are "overreacting," he said, to the Russian export ban because almost none of the conditions that were in place two or three years ago exist today. World wheat stockpiles, at 175 million tonnes for the 2010-11 season, may be down somewhat from their peak but are still 40 per cent higher than in 2007-08, according to the U.S. Department of Agriculture; oil prices are about half of their 2008 peak of $147 (U.S.) a barrel; and economic growth is weak in Europe and North America, which means the demand for animal feed is barely rising.

Still, Mr. Abbassian said the recent sharp rise in food prices is not welcome and that extreme weather conditions, which seem more common, will ensure that food markets become more volatile than usual. Volatility, he notes, attracts speculators, whose trades can only increase the frequency of wild price swings. "Liquidity can come from any direction at any time," he said.

Those swings, and the way they impact farmers' use of fertilizer, are a key factor in the takeover drama between Potash Corp. and BHP, the world's largest mining company. Potash Corp. dismissed BHP's unsolicited $130-per-share bid as "grossly inadequate," partly because it believes rising food demand and prices will translate into robust fertilizer prices.

Potash Corp. is exceedingly bullish on potash prices as food prices and demand pick up momentum. In its directors circular, amended on Friday, it said it could generate $10-billion in EBITDA - earnings before interest, taxes, depreciation and amortization - by 2015, assuming full operational capacity (which is said it cannot guarantee) and a potash price of $800 a tonne.

Analysts suggested extremely high utilization rates are a dream, given that potash supplies should increase by half by 2020, outpacing demand. UBS said utilization rates "above 82 per cent are required to shift up pricing significantly. … Utilization rates will peak at 75 per cent in 2020, but will be insufficient to catalyze a significant shift in pricing."

The UBS price estimate for potash between 2013 and 2015 is $400 a tonne, up from this year's estimate of $340. This suggests the recent food price surge will have to be long lasting if it is to have a dramatic effect on potash prices.

Potash rebounds

Potash is used almost exclusively for fertilizers and has no substitute. Fertilizer use is one of the most cost effective ways to boost crop yields, though many poor farmers in developing countries cannot afford it.

Last month, analysts at UBS predicted a sharp rebound in global potash consumption this year, to 27.5 million tonnes, up 42 per cent from 2009, when food prices slumped. UBS forecasts consumption of 32.4 million tonnes next year, following by several years of steady, if unspectacular, growth.