Remember the food and fuel crisis that preceded the global economic and financial meltdown? Many in the advanced economies have long forgotten it; people in developing countries have very vivid memories. Are we about to relive the crisis?
As a refresher, the introduction of biofuels mandates in the U.S. and Europe earlier this decade sparked a surge in demand for maize, vegetable oil and sugar cane to be converted to alternative fuels. In fact, most of the increase in global maize production during 2004-07 went for biofuels, as did a third of the increase in vegetable oil production. At the same time, growth in emerging and advanced economies was among the fastest on record, boosting global demand for energy, notably petroleum—which, in turn, made biofuels production more attractive. The third piece of the puzzle consisted of the growing concerns about the U.S. current account deficit and the housing market in the U.S.—which peaked in June 2006—that led to a sustained and unrelenting weakening of the U.S. dollar.
Where do these three crucial components of the past global food and fuel crisis—biofuel mandates, rapid growth in emerging economies and global demand for energy, and the dollar—stand these days? The biofuels mandates are still there—and in the U.S. alone, the use of biofuels has to treble by 2022. Growth in most emerging economies has recovered to pre-crisis levels, and demand for energy is as insatiable as ever. And after a period of strength during the darkest moments of the global economic and financial crisis, the U.S. dollar has weakened anew.
At the same time, food prices—even after a steady rise this year—are below the peaks observed during 2007-08, and so are prices for fertilizers. The dollar is also not as weak as a few years ago, although this owes much to the pressure on the euro. And factors that contributed to the last crisis—drought and poor harvests—have fortunately not been repeated as extensively this time.
But it’s better to be safe than sorry. The gathering clouds need to be used to urgently implement the lessons learned from the last crisis. Few of them have been put in place.