Asian governments must act now to prepare for a third spike in food costs that could lead to an outbreak of riots and social unrest that happened in both 2008 and 2011, a leading expert of the economics of food prices has warned.
Politicians must avoid the mistake of 2008 when governments such as India put an embargo on rice exports, Professor Yaneer Bar-Yam of the New England Complex Systems Institute (NECSI) said.
They should use also high-profile events such as the ADB meetings to send a clear call to western governments to reduce financial speculation in commodities that Bar-Yam said fuelled price bubbles.
The NECSI model that correctly predicted the outbreak of food-related violence in 2008 and the Arab Spring is predicting a price bubble by the end of this year.
The model is very robust that there will be a sharp increase in prices by the end of this year, Bar-Yam told Emerging Markets. It is pretty clear there is a coupling between high food prices and social unrest.
He said the threshold for social unrest was when the food price index run by the Food and Agricultural Organization hit 210. Yesterday the FAO said its index has stabilized at the relatively high level of 214.
Bar-Yam said prices spikes were caused by the conversion of corn production to ethanol and financial speculation, which tended to affect wheat and corn.
A lot of the issues in the Far East revolve around rice rather than wheat and corn. The question is what is going to happen at the end of this year with rice - and the answer is that it depends on the policy response, he said.
According to our model there is going to be a food price increase but we cant be certain whether there will be a rice price increase as that depends on the spillover effect.
The spike in prices four years ago was triggered by governments move to block exports to preserve stocks. Peter Timmer former Harvard professor and adviser to the Bill and Melinda Gates Foundation, said the trigger was an unexpected export ban in India.
Bar-Yam said in 2011 Asia was successful in blocking contagion from wheat and corn to rice and it was vital countries learned lessons. There is going to be upward pressure on rice prices due to global prices but countries can respond to that in different ways, he said.
He said and it was a mistake to assume prices revealed a true picture of supply and demand as markets were not necessarily self-adjusting.
The immediate priority for policymakers was to ensure markets in the United States and Europe were re-regulated. He said moves such as the Commodity Futures Trading Commission proposal to restrict the number of contracts a trader can hold were being resisted by investors.
But he added: Theres a movement to stop banks investing in commodities and to stop their investors from investing in commodities.
The world has to exercise as much ability as it can to influence local policy. So other countries have to let the US know that they care about these policies.