Forget the credit crunch for a moment. We are now in the early stages of a global “food crunch” that could have far more serious consequences. Take a look at the price of rice, a global food staple that feeds half the world. Rice is the barometer of the global food crunch.

In a Chart of the Day installment back on December 28, 2007, I noted the price of rice at 20-year highs. (You can view that Chart of the Day here.) The reasoning was given as follows:

The relentless rise in agricultural prices shows how all markets are connected. The high cost of oil has encouraged a politically subsidized ethanol boom; this in turn has led to record corn acreage in the United States. But more acreage for corn means less acreage available for other crops. When acreage goes down, supply goes down. When supply goes down and demand stays strong, prices go up. The United States is the fourth-largest exporter of rice in the world, so that makes a difference.

Big economic strides in the developing world are also taking their toll on food prices. As hundreds of millions of new laborers aspire to a middle-class lifestyle, meat consumption rapidly rises. Meat is very grain-intensive — you have to feed the cows and pigs — and that puts an even bigger demand on crop acreage. As rice shows, the unfortunate reality is that the world’s poor may be the hardest hit by energy and food inflation.

That was all a mere 14 weeks ago. The price of rice has gone up 60% since then.

That is alarming news when you are talking about the main food staple for 3 billion people. The credit crunch is no small thing, but house-poor Americans are not starving. With the price of rice where it is, starvation is a real concern. Not just tens of millions, but hundreds of millions of families are at risk.

The headlines are getting worse as desperation turns to anger. “Food Riots Rock Yemen” is a recent example. The World Bank has declared 33 nations at risk for “social unrest” due to the high cost of getting something to eat.

So why the deadly acceleration of this long-running trend? Is it all down to biofuels and increased meat consumption in China? Unfortunately, no. Things have entered a much more disturbing phase.

Credit Crunch Redux

What we have here is a looming market failure with no small resemblance to the credit crunch. The global grain markets are caught up in a vicious cycle, not unlike the one that gripped global financial markets.

As the subprime crisis unfolded, and news of toxic balance sheets spread, it became clearer that lending to one’s fellow bankers was a dangerous proposition. And so the banks began to hoard their capital, keeping it to themselves for fear of getting burned.

The banks’ refusal to lend touched off a self-fulfilling prophecy of downward-spiraling credit conditions, to the point where leveraged financial institutions began to fail. As the financial system “seized up” like an engine in vapor lock, it took massive cash injections from a lender of last resort, the Federal Reserve, to get things going again.

In this new and deadly “food crunch,” grain exporting countries play the role of frightened banks.

With the price of grains going through the roof, government officials in grain-exporting countries have become alarmed by rising food costs at home. Their natural response has been to artificially limit grain exports, through the use of expensive tarriffs and outright quotas.

With normal supply lines cut short — or in some cases, cut off completely — the global grain markets have been tipped into a panic. Suddenly, the marginal suppliers are no longer there. If you think of grain availability like financial liquidity in a time of crisis, the picture becomes clear.

No Luck for Farmers

Farmers everywhere (except, perhaps, in Europe and the United States) are furious at these export restrictions. The seizing up of the global grain trade has denied them an ability to profit.

After many years of struggle, when it looked like their hard work would finally be rewarded, many developing world farmers have discovered that they still can’t win. The export profits that would have come their way in a free market system have been diverted or destroyed instead, thanks to emergency measures from the local government.

The global food crunch is a “market failure” in the truest sense of the term. No one is really benefiting from this turn of events. The restrictive actions of grain-exporting governments are reminiscent of the Smoot-Hawley Tariff Act of 1930. Instead of a “beggar thy neighbor” policy, we are seeing the results of a “starve thy neighbor” policy. These tragic results are not intentional — but then, Reed Smoot and Willis Hawley probably didn’t intend to kick off the Great Depression, either.

Do countries have the right to punish their farmers in the name of national food security? A good question, but not one we are interested in here. Export restrictions are a driving factor in the global food crunch, whether anyone likes it or not. And so it becomes more vital to understand the effects than to debate the merits of the cause.

Hoarding Mentality

The anger of the farmers and the shutting down of grain supply lines has fueled a “hoarding mentality” that only intensifies as grain prices rise. Vertical price trends and scary headlines only reinforce the hoarding instinct.

As a result of all this, there is no simply no telling how high the price of rice and other food staples could go. In economist terms, food is the ultimate “inelastic good”; people have to eat, or they will die. Countries that are net importers of grain have to pay up, no matter the price.

So what can you and I do about all this? Unfortunately, not much.

It wouldn’t hurt for America to lay off the insanity of biofuel subsidies… burning up corn and taxpayer dollars in our gas tanks as the world wrestles with mass hunger. But that’s a problem of political will, a gigantic aircraft carrier that could take many years to turn around.

One thing we can do is recognize the importance of the agricultural supercycle. We will ultimately get through this global food crunch, one way or another. Somehow a long-run solution will be found.