How tight credit could hurt food production

The leader of the UN Food and Agriculture Organization is warning how tighter credit could effect food supply. Jacques Diouf says that small farmers will be unable to get credit to expand production.

Diouf comments are one of many were seeing before the G-20 meeting in London. As every interest or politician is making their voices heard in hopes of swaying what comes of the G-20 meeting. Diouf is calling on the G-20 to make more investments in agriculture to keep food supply growing and to prevent another increase in food prices.

From the Wall Street Journal, writer Patrick Barta explains the FAO's stance.

In 2007 and 2008, prices of corn, rice, and other grains rocketed higher amid a perfect storm of tight supplies, market speculation, and rising demand for crops in developing countries and for use in biofuels. The price spikes made it harder for people to afford basic foodstuffs, triggering violent protests in some developing countries and leading many economists to call for substantial new spending on farm production.

Prices have fallen by a third or more since then, and some analysts have warned of a possible glut of rice or other commodities as economic growth slows.

But grains prices are still 27% higher than in 2005, Mr. Diouf said, and global stocks remain low. Moreover, the number of people with insufficient food continues to climb. He said it's possible the tally of undernourished people in the world will surpass one billion, from 963 million in 2007, as the full brunt of higher food prices filters through.

A number of countries have stepped up rural spending over the past year, including China, which is making agricultural investments a key element of its economic stimulus initiatives.

But food-policy specialists fear any gains from such stimulus efforts could be offset by reduced credit from the private sector, making it harder for farmers to maintain output. The FAO is projecting global cereals production to decline this year due to smaller plantings and adverse weather, leaving 32 countries -- including Bangladesh, Haiti and Zimbabwe -- in need of foreign assistance.

Although governments are spending more, the global credit crunch "will constrain expansion of agriculture in the developing world this year," said Joachim von Braun, director of the International Food Policy Research Institute in Washington, in a recent interview. "We consider this to be a very precarious situation."

Mr. Diouf said the credit crunch hurts food-challenged countries in at least two ways: by making it harder for them to raise money to buy imported crops and by raising the cost of loans to small farmers.

With less credit available, farmers could be forced to hold back on planting or borrow from black-market lenders, saddling them with high-interest debts that could constrain their output for years.