Liam Dann: Sowing the seeds of a food price crisis

Banana crops have been destroyed in Australia. Photo / Getty Images

It is impossible to get away from the food story in 2011. Take the two biggest news events of the week - Egyptian riots and Queensland floods. Both are intimately connected to the global spike in food prices.

In Egypt, as in Tunisia, food prices have been a catalyst for unrest. You might say the issue was just one of the straws which broke the camel's back. After 30 years of autocratic rule no doubt there was a groundswell of support for change. But still, nothing motivates people to act like the fear they will not be able to feed their children.

In Queensland the cyclone that has devastated crops is at the other end of the story - the supply side.

The devastation of the banana crop is the current focus in Australia where price rises will likely be felt quickly by consumers at the supermarket checkout.

But the destruction of Queensland's sugar cane crops - following on the heels of wheat crop losses in the January floods - will have a more subtle but much wider effect. Wheat and sugar are omnipresent products in our processed foods. They are the high energy fuels on which Western civilisation has been built.

Unlike fruit and vegetables they are heavily traded commodities and the real effects of supply shortfalls caused by weather are exaggerated by traders who start buying up futures from the moment they hear storm clouds are starting to form.

Along with other food ingredients like milk powder it takes time for these price spikes to flow through to consumers.

We know from the last food crisis (2007-2008) that the lag between a rise in global commodity prices and prices on supermarket shelves is around six to nine months.

That's why local consumers didn't get really upset about the price of cheese until well after the global financial crisis had caused a slump in the commodity price for dairy.

Meanwhile in New Zealand this week Fonterra said its prices at its global dairy auction were up by another 7 per cent.

Across a wider group of New Zealand commodities prices are off the chart - literally.

"I've had to rescale it [the graph] - it used to only go up to 300," ANZ economist Steve Edwards told the Business Herald this week as he explained the latest record high on the bank's monthly index.

Debate about who or what is to blame remains split. There are those who see it as a major structural problem of supply and demand. Then there are those who see it as a spike caused by financial forces such as the inflationary monetary policies of the US and those speculative traders looking for the next big thing after the collapse of credit markets.

Yesterday at a press conference US Federal Reserve chairman Ben Bernanke denied that the stimulatory US monetary policy was causing inflation and exacerbating the food spike.

"It's entirely unfair to attribute excess demand issues in emerging markets to US monetary policy," the Daily Telegraph quotes him saying.

"Excess demand issues - well that's one way of talking about hungry people," a reader comment on the Telegraph website dryly observes.

That is the problem. Food is not an investment category or asset class in the same way tech stocks or bonds are. It is a human need so basic that otherwise peaceful people will stand up and fight for their right to it.

What we are seeing now are the seeds of a problem which could make the financial crisis of 2008 look orderly and benign.