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Egypt's Unrest May Have Roots in Food Prices, US Fed Policy

Kevin G. Hall

The price of grain has exploded after fire, flood and drought. Economists and experts in food security have warned repeatedly in recent years that an unbridled rise in food prices could trigger the very kind of explosion of citizen anger that's now threatening to topple the Egyptian government. Such anger is likely to rise elsewhere, too. (Ex-Press image)

WASHINGTON - Economists and experts in food
security have warned repeatedly in recent years that an unbridled rise
in food prices could trigger the very kind of explosion of citizen anger
that's now threatening to topple the Egyptian government. Such anger is
likely to rise elsewhere, too.

A large nation with lots of desert, Egypt must
import more than half of its food supply. Since 2008, there's been
sporadic unrest there as the cost of staples, from bread to fruits to
vegetables, has gone up steadily.

One of those warning about the
food prices was Hamdi Abdel-Azim, an economist and former president at
the Sadat Academy for Social Sciences in Cairo.

"If the rise in food costs persists, there will be an explosion of
popular anger against the government," he told the IPS Inter Press
Service in mid-November.

A few weeks earlier, political opponents
of President Hosni Mubarak had rallied to protest rising prices and to
demand price ceilings on products to protect Egypt's poor.

food prices aren't the only reason that Egyptians took to the streets
to try to topple their long-serving president. But they're a significant
factor, and a steady surge in global commodity prices reminiscent of
2008 is sure to bring new battles over food security this year.

against food prices recently rocked Jordan and Algeria. These same
rising prices were partly why Tunisia's strongman, Zine El Abidine Ben
Ali, fled his nation in mid-January. India and China are navigating the
difficult waters of trying to control rising prices in their populous

In the trading pits of commodity markets, the buzz is
that many poor nations are trying to hoard wheat, corn and other
staples. Such stockpiling has added to the bullish sentiment that's
driving commodity prices even higher.

"Countries are hoarding
grain supplies right now because they don't want to see what's happening
in Egypt happen to them," said Phil Flynn, senior market analyst for
commodities trader PFG Best in Chicago.

The United Nations Food
and Agriculture Organization took the unusual step last Wednesday of
updating its guide for policymakers in developing nations. It urged
nations to avoid "policy actions that might appear useful in the short
term but could have harmful longer-term effects or even aggravate the

Such actions in the past have involved export
restrictions by food-producing nations, which aggravated tight global
supplies in 2008 and led to a spike in prices. By restricting exports,
these nations, which include Argentina and Ukraine, drove down domestic
prices, discouraging production and causing even tighter global

The Food and Agriculture Organization compiles an index of basic food prices around the globe, and it peaked in December.

this new price shock only two years after the crisis in 2007/08 there
is a serious concern now about implications for food markets in
vulnerable countries," Richard China, the director of the U.N.
organization's policy and program development support division, said
last week in announcing the updated guidelines.

For U.S. farmers,
Egypt presents the eighth largest export market, much of it wheat sales,
since the country is the world's leading wheat importer. American wheat
and corn are sold across North Africa and the Middle East, prompting
worries by U.S. farmers that Egypt's problems will spread throughout the

Wheat prices have risen by more than 70 percent over the
past 12 months, and corn prices climbed in mid-January to their highest
level since July 2008, a period when global food prices soared. They've
since dipped slightly, to just under $6.60 a bushel Monday, but they're
expected to remain volatile, since corn production is expected to drop
14 percent globally, according to the U.S. Department of Agriculture.

corn farmers traditionally have had 80 percent of the Egyptian market,
although that dipped to 50 percent last year. There's less concern about
current shipments, especially since Egypt is thought to have adequate
inventories for now. The focus is more on what sort of government
emerges there.

"I think, longer term, it is really what's going to
happen with the transitional government. Is that some sort of
continuation," said Chris Corry, the senior director of international
operations for the U.S. Grains Council, which represents U.S. farmers.

issues in Egypt right now are basic, he said, noting, "The government
must function for banks to be open, for payments to get transacted, for
commodities to be purchased."

A number of factors are combining to
drive up the global prices of wheat, corn, soy and other commodities.
Some of the story is weather-related. Argentina, Australia and Pakistan
have suffered from heavy rains, which have damaged crop production.
Russia is recovering from a devastating drought last year.

part of the story is demand. Big emerging markets such as China, India
and Brazil continue to soak up greater shares of global supplies, and
the recovery in the U.S. economy, the world's biggest, is accelerating.

third explanation that's gaining acceptance is that the U.S. Federal
Reserve inadvertently exacerbated the price picture for grains and other
commodities. The Fed has been engaged in what economists call
"quantitative easing," buying U.S. Treasury bonds to attack the threat
of deflation - the phenomenon of falling prices across an economy.

easing has the effect of raising asset prices, whether they're the
prices of stocks or what traders are willing to pay for commodities such
as wheat or corn. One of the side effects of this policy is that the
dollar weakens against other currencies, and that's helped push up the
global prices of commodities.

"The truth of the matter is that
when the Federal Reserve moved on the quantitative easing, it did export
inflation to a lot of these emerging markets," Flynn said. "There's no
doubt that one of the side effects of the weak dollar and quantitative
easing has been rising commodity prices. It helped create this bullish
environment for commodities. This is a very delicate balancing act."

a view shared by Ed Yardeni, a veteran financial market analyst, who
reached a similar conclusion in a research note to investors Monday. He
joked that Fed Chairman Ben Bernanke should be added to a list of
revolutionaries, since his quantitative easing policy, unveiled last
year in Wyoming, has provoked unrest and change in the developing world.

he first indicated his support for such a revolutionary monetary change
in his August 27, 2010, speech at Jackson Hole, the prices of corn,
soybeans and wheat have risen 53 percent, 37 percent and 24.4 percent
through Friday's close," Yardeni noted. "The price of crude oil rose
19.8 percent over this period from $75.17 to $90.09 this (Monday)
morning. Soaring food and fuel prices are compounding anger attributable
to widespread unemployment in the countries currently experiencing

Although the policy was announced in August, the Fed
didn't begin purchasing bonds until November. It's expected to buy $600
billion worth through June, in hopes of driving down the return on
long-term bonds and forcing more investor risk-taking in the economy.

are a lot of different sticks in the fire here," said Jerry Gidel, the
president of Midland Research Inc., which provides assessments of
financial risk. What happens to the price of one food crop affects
others, he added, because "it is a human-consumption commodity, and
things can get emotional, and they do get emotional. And right now,
we're kind of in one of those periods."

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