A Note on Rising Food Prices

It must be twenty years now since Lester Brown wrote "Who will feed China?" but many of his predictions have proven unfounded. Basically, his case was that with diminishing water tables, increasing soil erosion, conversion of arable land into suburban sprawls, rising populations and double digit economic growth allied with an increasing 'meatification' of the diet of the new middle class, that these trends would all contribute to a massive shortfall in grain supplies. But China was a net exporter of food until 2008 despite having something like only 8% of the world's arable land and a fifth of it's population.

In fact, contrary to all expectations they've handled this growth in terms of food security astonishly well. Brown was right though about the meatification of diet but this demand for feedstock has largely been met by increased Brazilian soyabean production - the major by-product of which hasn't been inflationary since a pre-existing food source hasn't been diverted as the Brazilians have opted to arabilise hundreds of thousands of hectares of Amazonian vegetation and rainforest. So, it has been the environment which has been the big loser in this resource switch. The extra soyabean production has actually taken pressue off the conventional cattle feedstock such as corn which is instead released for human consumption and thus helped reign in food inflation.

Anyway, grain-based food sources are the staple of the poorest - the "bottom billion" as Paul Collier would have it - and it's rising demand, by virtue of the fact that they're the fastest growing demographic on the planet, that will probably contribute more to long-term global food price increases. There will simply be more mouths to feed with an only marginally increasing overall grain supply with the great boosts in yield that the Green Revolution provided being largely exhausted and many banking on Genetically Modified Organisms (GMO's) to fill the gap. So, when population pressures are allied with the inflation that inevitably accompanies rapid economic growth, you would expect to see steady long-term increases in food prices but this hasn't been the observed trend. Look at the historical price of food staples over the past twenty years since trade liberalisation took off in Asia in 90/91;

Wheat - Monthly Price (US Dollars per Metric Ton) - Commodity Prices - Price Charts, Data, and News - IndexMundi

Maize (corn) - Monthly Price (US Dollars per Metric Ton) - Commodity Prices - Price Charts, Data, and News - IndexMundi

As can be seen from these charts the price of wheat and maize remained relatively unaffected, practically constant in fact, despite fifteen years of double- digit growth in India and China. Only in late 2006 did food price rises begin to occur, so in order to explain that, we'll have to identify something else other than economic growth which had been occurring anyway for the previous 15 years. Perhaps a certain threshold had been finally reached with respect to rising GDPs but this is a pretty weak causative factor in light of other trends such as the switch to biofuels, which I think really began to attract investors attention towards food commodities. Now the United States Department of Agriculture at the time estimated that America diverting a third of it's maize production to ethanol had only a negligible impact on food prices (3% I think the figure was) but later research by Oxfam gave 30%, the IMF said between 20-30% and a World Bank Report (by Aditya Chakraborty) asserted that US and EU agrofuel policies contributed to three quarters of the rise in food prices between 2002 and 2008. Finally, in an OECD report which concluded 60% of rise was caused by biofuels there came a reference to how this price hike helped fuel speculative activity;

" .. the most important factor in the food price increases was the large increase in biofuels production in the US and the EU. Without these increases, global wheat and maize stocks would not have declined appreciably, oilseed prices would not have tripled and price increases due to other factors such as droughts would have been more moderate. Recent export bans and speculative activities would probably not have occurred because they were largely responses to rising prices".

From Donald Mitchell, A Note on Rising Food Prices, July 2008.

The Mitchell Report was apparently suppressed by the World Bank for fear of embarassing Bush and his aggressive agrofuel policies but it did presage the activity of speculators who would come to play a much larger role in the second major food spike in 2008 - let's keep one eye open here at least.

http://www.mcg-j.org/english/e-theory/economics/ag-prot.html#2

". If the growers protested, "But in point of quantity England nearly feeds itself, not deriving, even in short years, more than one-twelfth of its supply from abroad", the Free Traders could, and did, in their turn retort, "This independence is nevertheless purchased at a price, and unnecessarily purchased, when the bounty of foreign lands might be made to flow to Britain in exchange for British goods. You talk of insurance against famine, but do you realise the vastness of the premium?"
The Corn Laws and Social England, By: C. R. Fay p.111