By David Dapice
Yale Global Online Magazine
18 February 18, 2011
In wealthy nations as well as in poor ones, consumers express alarm about fast-rising food prices, and their governments are well aware that shortages can quickly translate into unrest and political crisis. Complaints today may be mild compared with those looming ahead unless governments take steps to curb policies that encourage speculation, warns economist David Dapice. Subsidies that divert corn to ethanol fuel reduce food supplies and add to price rise. Despite extreme weather events in some exporting nations, per-capita food production has climbed in recent years, he explains, adding that low interest rates encourage speculation, stockpiling and waste. Price hikes are less noticeable for wealthiest consumers whose products carry high marketing and packaging costs, but for the poor it's a question of survival. Research and technology advances in the agriculture industry may sustain a growing population for only so long. Failure to address the needs of the poor could risk security for all.
Extreme weather, economic forces of rising demand and speculation threaten global food security
The sharp rise in food prices has sparked fears of a global food shortage. The Food and Agriculture Organization recently announced that food prices had hit an all-time high, and the World Bank stated that 44 million more had fallen into hunger due to food prices. Spreading unrest in the Middle East fueled partly by skyrocketing food prices adds urgency to the gathering crisis.
Those monitoring climate change observe, correctly, that extreme weather events are harmful to crops, as recent severe droughts in Russia and China and floods in Australia, India, Pakistan and Europe showed. Others observe that China is growing fast and its middle-class citizens include more meat in their diets, which requires more feed grains. Some inflation hawks suggest a hike in interest rates, despite high unemployment, because rising commodity prices might spark inflation.
Whether these fears come true or not, a complex array of global forces shaping the next decade may make current problems seem easy. First, production is up. From 2006/07 to 2010/11, the US Department of Agriculture estimates total production of rice, wheat, corn, soya and other coarse grains and oilseeds rose from 1.78 to 1.96 billion tons, an increase of 10 percent. World population grew less than 5 percent in those four years, so output is rising more than twice as fast as population. How long this may continue into the future is a different question. But it's hard to argue that bad weather has driven up food prices when the world has more per capita than before.
Second, China's demand is a factor, but so far mainly in soya and other oil seeds. Increasing use of these oilseeds is mainly for animal feed. This demand is growing faster than human demand for basic grains. China's output of soybeans is stagnant, so any increased consumption comes from imports. China's imports of oil seeds grew about 30 million tons from 2006/7 to 2010/11, accounting essentially for all import growth in the entire world. Total global oil seed production rose only 36 million tons, so China accounted for most global production growth in this period. China's net imports of wheat, corn and other grains grew modestly, by about 4 million tons when production grew by about 140 million tons, though this may change if drought cuts into wheat supplies. Corn and other grains can substitute to some extent for oilseeds in animal feed, so pressure on oil seed prices translates into general pressure on grain prices. Farmland can be planted with soybeans or corn; more of one often means less of another.
Third, the US ethanol subsidy diverted more than 100 million metric tons of corn into ethanol last year. This did little to reduce global warming, and made basic grains and meat more expensive for most people in the world. Nearly a third of US corn is now used for fuel. If the Senate lowered the US deficit by reducing the tax break on ethanol, corn prices would drop and China's increased consumption would easily be accommodated. Since there was a recent decision to increase the amount of ethanol in gasoline, this problem will likely intensify. A move to cellulose-based ethanol would be helpful. Land released from corn could be used for soybeans and reduce prices for several crops.
Fourth, the impact of higher grain prices is felt in all nations, but unequally. A pound of flour used to cost about 12 cents in 2007 and is now about 20 cents, a jump of two-thirds. A loaf of bread in the US normally costs up to $2 a pound, so even a huge jump in wheat prices has modest impact on final bread prices because much of the consumer price is packaging and marketing costs. This is not true in poorer countries, where the rise in prices is more direct. In any case, grocery-bought food is only a 10th or so of US consumer spending. In poorer nations, food takes up half or more of total spending. Urbanization has made unemployment and high food prices a painful combination, more so than in rural areas where many live on farms and can, to some extent, grow their own food. For the unemployed and poor in cities, this jump in food prices literally leads to belt-tightening.
Fifth, many countries try to protect their consumers by increasing imports and subsidies, even blocking exports of food. Russia did this to wheat during its drought. The effect: World prices jump more as demand fails to adjust - even for eating less meat - due to subsidies. Supply to other countries drops as exports end, prompting many importers to stockpile extra food and pushing some countries towards self-sufficiency due to the perceived unreliability of the world food market.
Sixth, the jump in Chinese soybean imports was only half driven by consumption. Stocks of oilseeds in China grew by 15 million tons from 2006/7 to 2010/11. There are various ways to interpret this, but one is that the Chinese government, fearing a weak dollar, decided to keep reserves of food rather than US Treasury debt. It's otherwise difficult to understand why stockpiles of oilseeds would skyrocket when prices are doubling. It could be panic stockpiling or speculative behavior by state firms with access to cheap credit. Whatever the explanation, a large part of the demand seems to come from speculative buying - and it might not only be in China. If real interest rates begin to approach normal levels, such speculation is more expensive and normally reduced.
Seventh, for those inflation hawks, the only way that loose money causes inflation is through this speculative channel. Money supply and loans in the US are scarcely growing; there's immense spare labor and capital in the system, even adjusting for skills and different types of demand. If low interest rates are causing inflation, it's due to speculative purchases of commodities, more than their use.
In conclusion, increasing food prices is a major problem, especially in poor nations with large urban populations. The increases cause political instability, bad economic decisions and real hardship. The US contributes to this problem with its ethanol program; to a lesser extent, China does, too, with stockpiling.
If climate continues to move toward extreme temperatures, droughts and floods, growing food will be more expensive and uncertain. In any case, farmland is lost to urban growth, and water is pumped excessively from many aquifers. While technology and investments help offset these negatives, it's not clear if they'll be enough to push agricultural growth along at past rates. Increasing food research and development would be a wise precautionary move.
Demand for meat is growing in many developing nations, and this implies more demand for grains and oilseeds. Since a pound of packaged beef contains up to five pounds of grain, further increases in grain prices would push meat prices higher, eventually depressing consumption. Per-capita meat consumption could be reduced with a net positive impact on health, so that part of demand adjustment is not all bad. Furthermore, some estimate that up to half of all US food is wasted. More expensive food would doubtless reduce that fraction and further ease supplies
However, for those who seldom eat meat in the best of times, jumps in food prices cause immense problems. It's not at all clear that the policy of major players is concerned with this group. But they might do well to remember that when people are injured and ignored, they find ways to get the attention of those who caused the pain.
