Professor Emeritus of Economics at the University of Munich, is a former president of the Ifo Institute for Economic Research and serves on the German economy ministry’s Advisory Council. He is the author, most recently, of The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs
The war in Ukraine has led to an explosion in global food prices. Before Russia’s invasion, Ukraine accounted for 10 percent of global exports of wheat, 13 percent of barley, more than 50 percent of sunflower oil, 5 percent of rapeseed oil, and 15 percent of corn. But these deliveries have now been disrupted on a massive scale, because of Russia’s blockade of Ukrainian ports. In April, the global FAO food price index was already 30 percent higher year on year, and 62 percent higher than in 2020 on average. And threats to this year’s harvest mean that additional price spikes are looming.
Higher food prices affect consumers all over the world. But poor countries are especially vulnerable. Because they already must spend the lion’s share of their income on food, they simply cannot compete with other countries when prices rise. Increased poverty, hunger and starvation, and widespread protests will become inevitable.
The 2007 ‘tortilla crisis’ offers a preview of what awaits us. Owing to state subsidies to encourage production of bioethanol fuel in the United States and other countries, the supply of corn available for use as food and animal feed had been gradually decreasing. As a result, corn prices doubled between the winters of 2005-06 and 2006-07, and tortillas became 35 percent more expensive. In January 2007, hunger protests erupted in Mexico City, because people could no longer afford to buy tortillas.
Following this surge in corn prices, farmers started reallocating land that had previously been used to grow wheat, which in turn led to a spike in wheat prices in 2008. And when consumers responded to these price increases by switching to rice, the price of the latter also increased.
Making matters worse, countries such as Argentina, India, Kazakhstan, Pakistan, Ukraine, Russia, and Vietnam responded to the food-price crisis by imposing export bans to protect their people from price increases. But these policies merely worsened the global scarcity, causing prices to rise even faster. By 2008, prices for wheat, corn, and rice had tripled from their 2006 levels. Today, this pattern is already being repeated: India has begun banning wheat exports, and other countries will soon follow.
As food prices continue to increase, more countries will experience social unrest. In the tortilla crisis, the protests that started in Mexico spread to many other developing and emerging economies over the following year. Hunger protests, many of them violent, occurred in 37 countries.
These knock-on effects continued to materialize for several years. For example, the 2010-11 Arab Spring could be seen as a belated consequence of the tortilla crisis. After temporarily falling in 2009, food prices had climbed even higher than before. When a Tunisian greengrocer set himself on fire to protest corruption, he launched a movement that quickly spread across the region.
The mechanisms that led to the tortilla crisis are still intact. To this day, land that once was used to grow crops for food is used to produce biofuels. Faced with a choice between using harvests to feed people and to fuel cars, policymakers and farmers often decided in favor of the cars. It has been estimated that 4 percent of the world’s agricultural land is used for growing biofuels and 40 percent of US corn production is used to make ethanol.
And now that crude oil prices are rising, this share is likely to grow even larger, because crude oil and biofuels have been in a direct, one-sided substitution relationship ever since fossil fuels stopped being the cheaper alternative.
In addition to the immediate war-related price increases, other food-price effects of the conflict are now accumulating. This fall and winter, the impact of the missing harvests will become apparent on world markets, and the crisis will enter a new critical phase — with renewed hunger protests and heightened risks to global peace and stability.
In fact, the number of lives threatened by these impending humanitarian catastrophes could dwarf anything we have seen so far in Ukraine. The international community therefore must push for a ceasefire and peace negotiations. There is too much at stake for either party to continue to set its sights on an outright victory in the war.
and QUOTE: Land that once was used to grow crops for food is now used to produce biofuels. Faced with a choice between using harvests to feed people and to fuel cars, policymakers farmers often decided in favor of the cars.