Political risks multiply as world food prices reach 30 year high
6 June 2008
UN Secretary General Ban Ki-moon has told a summit in Rome that food production has to rise by 50% by 2030 to meet demand. The summit, sponsored by the UN, comes as food costs have reached a 30-year high in real terms, causing riots in some countries.
The host of the conference – the UN's Food and Agriculture Organisation (FAO) - has warned industrialised countries that unless they increase yields, eliminate barriers and move food to where it is needed, a global catastrophe could result.
Poorer countries have seen a 40% increase in their food imports bill this year, and experts say some countries’ food bills have doubled in the past year. Global food price increases have been driven by increased demand, poor weather and an increase in the area of land used to grow crops for bio-fuels.
Restrictions on rice exports have been put in place in major producing countries such as India, China, and Vietnam. Importers such as Bangladesh, the Philippines and Nigeria have been hit hard. In Egypt, where bread is subsidised, price increases are putting a big strain on the government’s budget.
The global food shortage is heightening political risks around the world and different countries are likely to be impacted in different ways, according to Rafael Gomes, deputy director of political risk at Exclusive Analysis, a strategic forecasting company working with the ten largest political risk syndicates at Lloyd’s.
“The problems associated with food shortages will lead to increased claims on political risk policies but will also stimulate demand for cover from businesses at risk,” Mr Gomes says. “The main relevant policies are contract frustration; non-payment and non-delivery; asset damage from political violence; expropriation due to land being re-allocated for agriculture; and, at the extreme, nationalisation of food industries.”
Political risk insurance is a specialist business for a number of Lloyd’s syndicates. “We’re watching the effect the price rises are having on soft commodity businesses. That includes wheat, soybeans and rice,” says Simon Low, Political Risks underwriter with Ark Underwriting. “The biggest concerns we have are riots and potential seizure by foreign governments. If the clients’ stocks of soft commodities are left waiting around a port we would want to make sure that suitable security measures are in place to protect them.”
Mr Low says that governments bringing in protectionism and import or export embargoes are also a concern. This is important in terms of contract frustration, where a business might have a contract to deliver a quantity of a commodity but they are prevented from doing so by a force majeure peril. “This could mean having to find wheat, for example, from another source as a distressed buyer and being unable to secure the return of any deposits they may have made,” Mr Low explains. “We are reviewing the amount of contract frustration cover we are offering for this type of situation.”
The rise in food prices has wide implications. Where the local environment is being put under stress due to food shortages there will be a knock on effect as people become more concerned about putting food on the table than keeping the economy on track, Mr Low warns: “A smooth running economy depends on its workforce being able to obtain basic foodstuffs and operate in a secure safe environment.”
Last updated on 06 Jun 2008
