The World Bank has joined the chorus warning the world of an impending food crisis with damaging food price inflation. In its late-August edition of its Food Price Watch the Bank reported that global prices for food as reflected by its Food Price Index rose 10 per cent in July 2012 alone. The prices of staples such as corn and soya bean were at an all-time high that month, with the increase in corn prices amounting to 25 per cent and that in soya bean to 17 per cent over a single month. Earlier, the FAO had reported that its Food Price Index (FPI) rose by 6 per cent in July 2012, driven by grain and sugar prices. Cereal prices had risen by 17 per cent in June relative to the previous month, maize prices by close to 23 per cent and wheat prices by around 19 per cent.

While longer-term factors underlie this third food price spike in a five-year span, the immediate and proximate cause of the inflation is a set of weather-induced production shortfalls in the larger producers. Prime among these is the U.S., the central agricultural belts of which are experiencing their worst drought in almost half a century. Reports from the National Oceanic and Atmospheric Administration of the U.S. are startling. July 2012 was the hottest single month in the country on record, and the first seven months of 2012 were on average the warmest since records began to be kept in 1895.

The two crops whose production has been affected the most by this extreme weather event are maize (corn) and soya bean. According to the US Department of Agriculture (USDA), the state of 50 per cent of the maize crop and 37 per cent of the soya bean crop is “poor” or “very poor” condition, which is the worst assessment since 1988. Persistently falling maize yield projections placed it at 123.4 bushels per acre in mid-August, the lowest since 1995-96.

These projections matter and are affecting market sentiment because the U.S. is among the largest producers and exporters of corn and soya bean. It accounts for nearly half of world exports of corn and about one third of the exports of soya bean. It follows that the effects on supply and prices of the shortfall in the US would be quickly transmitted to global markets for these commodities. The problem is made worse by the fact that in a profit-seeking world corn has alternative uses besides directly entering the food chain. Forty per cent of the crop is estimated as being absorbed by the ethanol companies and about a third as entering feed required by the meat and poultry business. So, when output falls, demands from competing sources tend to drive up prices to even higher levels. Finally, even if the worst production shortfalls are in corn and soya bean, other commodities such as wheat would also be affected, since they can substitute for expensive corn. Thus, there are fears that wheat production would be diverted to feed production, affecting supplies available for direct human consumption.

Moreover, when the weather worsens in one part of the world it is likely to be bad elsewhere as well, with parallel consequences. To quote the Bank’s August Food Price Watch report: A “dry summer in the Russian Federation, Ukraine, and Kazakhstan has contributed to projected wheat production losses in excess of 6 million tons, or 10 per cent of their projected annual production. A drier monsoon in India, with July rainfall 20 per cent below average, is expected to reduce this year’s crop by 2.5 per cent—although that crop is still projected to be the second largest on record. More worrisome, concerns are mounting regarding the emergence of el Niño during the next two months (which the U.S. Climate Prediction Center considers as “likely.”) This could potentially cause devastating effects on wheat harvests in Australia, while boosting maize and soya bean crops in South America.”

Given the myriad ways in which food markets are integrated globally, the impact of the these increases are bound to be felt by net food purchasers everywhere, with the effect being most damaging in countries that are importers of food. India is not a major food-importing nation and is currently sitting on stocks adequate to meet demand even if the current close to 20 per cent deficit in the Southwest monsoon persists. In April 2012, rice and wheat stocks at 333.5 lakh tonnes and 199.5 lakh tonnes respectively were much higher than the prescribed minimum buffer limits of 142 and 70 lakh tonnes for that time of the year. A consequence has been that the Food Corporation of India has run out of appropriate storage for the stocks it has been able to procure and needs to hold.

But despite this evidence of plenty, prices in India too have been rising. What is surprising is that according to the World Bank’s figures, over the year-ending July 20012 India recorded the second largest (after Sudan) increase in wheat prices in July among all countries, and the third largest (after Malawi and Rwanda) increase in rice.

If demand-supply imbalances cannot explain the buoyancy in prices in India, two other factors possibly played a role: cost increases and speculative activity. The role and effects of both these factors can intensify in the current global context. The expected spike in global food prices can harden speculative expectations of price increases. And given the relationship between food and oil prices, oil prices could harden too adding to the cost increase that influence the Indian price level. In the circumstances, the Indian government cannot remain complacent on the grounds that India is less integrated with global food markets than are many other countries. Prices could rise here too, adding to the food price inflation the country has already been burdened with.