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end of cheap food

Page history last edited by Brian D Butler 11 years, 8 months ago

page director: Brian D. Butler

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if you are interested in contributing see here

 

 


 

End of Cheap food

 

 

one of the major underlying trends that are shaping our world today     see also: rising inflation worries 2008  ,  High Oil Prices  ,  Weak US dollar

 

 

Potential factors that might be driving up food prices worldwide

 

  1. rapid demand for more energy-intensive food in Asia (as people get richer, they want to eat more meat, beef.  But raising beef takes more energy, and more grain than if people just ate the plain grains themselves.  This increases overall demand on the grains markets. 
  2. the competition that new biofuels are posing for land;  As farmers of food have to now compete for land with farmers for fuel, there is a lower supply of good land available for food production.   According to studies recently published in the OECD-FAO Agricultural Outlook, a paper on the causes and consequences of rising food prices, and a report on the economic assessment of biofuel support policies. The evidence is pretty clear as they indicate that this is the main reason.  The main crops that are being used for fuel are corn (maize), wheat, and vegetable oil, so its clear to see that government incentives (especially in the USA) are a main driver to the price escalation in these products.  
  3. the effect of drought on global agriculture;  droughts, hurricanes, cyclones, etc...they all reduce the supply of crops in any particular year.  Countries such as Bangladesh, and Myanmar have been particularly badly hit recently. 
  4. Speculation.  Always a popular scapegoat as people look for culprits in the cause of higher food prices.  But are they to blame?  Probably not.  See our discussion on speculators and commodity prices for more details.

  5. Price controls, and export controls by exporting countries.  According to recent reports by the Economist magazine, this could be a major factor of the rise in prices of food globally.  They specifically looked at countries such as Vietnam that were limiting rice exports, or Argentina and the export taxes on agriculture as contributing factors.

  6. High prices of oil has had the effect of making it more expensive to transport food products to market, and has had some effect on price escalation.

  7. Weak US dollar has made some food items seem more expensive (especially imported food into dollar-denominated economies).  In addition, some contracts for food items may be priced globally in dollars, so as the dollar has weakened, the price globally of food would need to rise in dollar terms.

     

 

 

External Links:  further discussion about this trend

 

 

Effects of this trend:

 

Key question: will the inflation level in the food sector come back down?  how soon?   is this inflation that we are seeing now = to just a one-time readjustment of the prices higher?  (caused by less land available due to biofuels incentives).  Or, should we expect the prices to continue to rise year after year into the future? 

 

My guess is that the effects of the corn-ethanol subsidies on world food prices is a "one-time" effect.  After prices move higher the first year due to lower supply, then they should find equilibrium.  That is, unless either (a) the expectation of future inflation causes actual rates to rise further (psychological effect), or (b) the prices will actually come down because more farmers will be attracted to the market in the future due to the higher prices, and due to the higher-supply in the future, and the prices will come down. 

 

The trouble is that food price inflation can lead to all-sorts of other inflationary pressures.  As workers are faced to pay more for food, they may demand higher salaries, which can make products more expensive, and thus creating a vicious cycle.  The fed is right to be concerned, and to fight inflation before it becomes expected and anticipated.  Because as long as inflationary expectations are low, there is little chance that the cycle can become vicious. 

 

 

What needs to be done, now.

 

1.  Countries need to avoid the temptation to hoard food.

 

Countries such as Vietnam that are afraid that rice supplies will not be enough (or that future prices will rise) are hoarding (collecting) vast collections of rice.  By not exporting the full production, they are only increasing the pressure upward on price.  By holding back supply, country after country is only making the situation worse.  What needs to happen is that the agriculture producing nations need to remove export limitations (as Argentina has done by heavily taxing exports) and allow market forces to help boost agriculture supply. 

 

 

2. Corn-ethanol subsidies have to go (and should be replaced with "sugar ethanol")

 

In response to a mixture of high oil prices, and fears of energy security... the USA had the idea to seek alternative energy, which led to ethanol subsidies, which led to farmers switching to corn production and convertion away from food and toward fuel production, which has resulted in more expensive grain prices around the world.  This is having a huge impact on both poor and rich world farmers, and consumers around the world.  As far as global trends go, this is really a big one!

 

Food prices are rising on a mix of strong demand from developing countries; a rising global population; more frequent floods and droughts caused by climate change; and the biofuel industry’s appetite for grains. The price of rice and wheat has doubled in the past year while freight costs have also increased sharply on the back of rising fuel prices

 

1.  corn Ethanol for fuel

2.  so, farmers switch crops, and corn prices rise, along with other grains as Americans start trying to power more of their cars with corn (ethanol)

3. food prices rise

4.  feedstock grain for cattle rises

5.  Farmers no longer able to economically feed cows, pigs, chickens

6.  Cattle farmers begin to liquidate (reduce) cattle stock

7.  Temporarily there is a drop in meat prices as inventory is liquidated

8.  prediction (based on futures prices)....is that there will soon be a massive upward pricing in steak, and pork prices.  (only at higher prices will it be economical for farmers to raise cattle and pigs because of the high price of grain (feedstock for the animals).

 

Macroeconomic response:

 

1.  Inflation (food prices rise)

2.  Governments around the world attempt to control inflation in various ways.  some do the right thing (inflation targeting with monetary policy), while others do the wrong thing (price controls as we are seeing in Argentina, Venezuela, China, Russia, etc)....

 

 

Solution

 

What has to be done?

1.  The US needs to stop this crazy idea of running cars on corn.  The idea that we will just grow our own fuel is fine, but it is wrecking havok on the worlds food prices. 

2.  Switch focus, and look to sugar-based ethanol, which is better for fuel anyways.  And, who really cares if the price of a candy bar gets to $10? (as opposed to increased Bread, corn, grain, and cattle prices).

 

Why it probably wont happen:

1.  The US doesnt grow enough sugar cane (the US is a net importer of sugar already), and the sugar industry in the US is heavily protected with subsidies and import quotas.

2.  The corn lobby in the US is powerful and is pushing for import tarriffs on imported sugar-based ethanol

3.  Politicians have this idea that the US should be "energy-independent", and therefore argue that ethanol is the right way to go.  Forget the fact that we dont get all that much energy from a gallon of corn-ethanol (as compared to sugar-ethanol).

 

 

Why sugar -based ethanol makes alot of sense:

1,  Countries that are friendly to the US can produce alot of sugar (the entire Caribbean, Central and South America), as opposed to the unfriendly Middle east for oil.  Brazil, for example is already the world's number one sugar cane- ethanol producer, and almost all cars in Brazil can run on that technology.

2.  sugar-based ethanol is more powerful fuel (than corn-based ethanol)

3.  if sugar prices were to rise as a result, nobody would starve (from not being able to afford food). Who cares if the price of a candy bar were to increase?

 

 

Politics

 

People might not care so much is the price of corn goes up, but once the price of steak goes up (dramatically) at the supermarket in the near future, I think people will start complaining. But, more than likely, they wont make the connections.....ie. ethanol subsidies...leads to expensive corn....which makes grain farmers switch to corn production....which leads to expensive feedstocks for cattle....which leads to cutbacks in production....which will lead to high steak prices....and expensive grocery bill.....BUT, ill bet that most people will just blame the next President (maybe a democrat), rather than tracing the problem back to the source (corn-ethanol, rather than sugar-ethanol).....

 

 

see more:  the problems with USA corn ethanol subsidies

 

 

 

Other potential solutions (to the escalating food prices)

 

Japan has large stocks of rice, based on its World Trade Organization (WTO) obligation to import rice. These stocks are not sold domestically but allowed to decay and used as livestock feed. WTO obligations prevent Japan from reexporting this rice. But the United States can relieve Japan of these obligations, thus allowing the country to sell its rice commercially or provide it as aid.

 

 

 

 

"Agflation"

 

- what does that mean?;   agflation is inflation in the Agriculture sector.  Food prices are rising on a mix of strong demand from developing countries; a rising global population; more frequent floods and droughts caused by climate change; and the biofuel industry’s appetite for grains.  This is hurting consumers, but is helping farmers in poorer nations.  It is causing inflation concerns around the world. 

 

 

Key question: will the inflation level in the food sector come back down?  how soon?   is this inflation that we are seeing now = to just a one-time readjustment of the prices higher?  (caused by less land available due to biofuels incentives).  Or, should we expect the prices to continue to rise year after year into the future? 

 

My guess is that the effects of the corn-ethanol subsidies on world food prices is a "one-time" effect.  After prices move higher the first year due to lower supply, then they should find equilibrium.  That is, unless either (a) the expectation of future inflation causes actual rates to rise further (psychological effect), or (b) the prices will actually come down because more farmers will be attracted to the market in the future due to the higher prices, and due to the future higher-supply, the prices will come down. 

 

 

 

Potential Benefits of a rise in food prices:

 

On the positive side, it has the potential to lift millions of the worlds poor out of poverty if they happen to be food producers, and it might eventually lead to the reduction of trade barriers in food.  If the US, Europe and Japan were able to take advantage of the high price of food to dismantle the protectionist trade barriers, then the structural changes could benefit millions of food producers around the world.

 

 

 

For additional reading: 

 

the Economist Magazine recently ran an article about the "end of cheap food", and why basic food commodity prices are rising (at an alarming rate). 

 

 

Note:  Chinese food inflation is NOT caused by the US ethanol policy!!

 

In spite of what most jouralists would have you believe, the US policy of Ethanol for fuel is NOT causing grain prices in China to rise.  In fact, China is seeing inflation in food prices but the root cause is NOT the US ethanol policy.  This is because China produces 95% of all the grain it uses inside of China itself.   read more here: Changes are happening in China

 

 

 

 

Read more from Kookyplan

 

 

 

 

 

 

 

External links:  News from the web

 

High food prices may force aid rationing

By Javier Blas in Washington and Gillian Tett in London

Published: February 24 2008 22:02 | Last updated: February 24 2008 22:02

 

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The United Nation’s agency responsible for relieving hunger is drawing up plans to ration food aid in response to the spiralling cost of agricultural commodities.

The World Food Programme is holding crisis talks to decide what aid to halt if new donations do not arrive in the short term.

 

emergence of a “new area of hunger” in developing countries where even middle-class, urban people are being “priced out of the food market” because of rising food prices.

 

The warning suggests that the price jump in agricultural commodities – such as wheat, corn, rice and soyabeans – is having a wider impact than thought, hitting countries that have previously largely escaped hunger.

 

“We are seeing a new face of hunger in which people are being priced out of the food market,” said Ms Sheeran.

Hunger is now “affecting a wide range of countries”, she said, pointing to Indonesia, Yemen and Mexico. “Situations that were previously not urgent – they are now.”

 

n response to increasing food prices, Egypt has widened its food rationing system for the first time in two decades while Pakistan has reintroduced a ration card system that was abandoned in the mid-1980s.

 

Countries such as China and Russia are imposing price controls while others, such as Argentina and Vietnam, are enforcing foreign sales taxes or export bans. Importing countries are lowering their tariffs.

 

 

 

 

 

 

 

 

Cheap no more

Dec 6th 2007

 

Rising incomes in Asia and ethanol subsidies in America have put an end to a long era of falling food prices

 

ONE of the odder features of last weekend's vote in Venezuela was that staple foods were in short supply. Something similar happened in Russia before its parliamentary election. Governments in both oil-rich countries had imposed controls on food prices, with the usual consequences. Such controls have been surprisingly widespread—a knee-jerk response to one of the most remarkable changes that food markets, indeed any markets, have seen for years: the end of cheap food.

 

In early September the world price of wheat rose to over $400 a tonne, the highest ever recorded. In May it had been around $200. Though in real terms its price is far below the heights it scaled in 1974, it is still twice the average of the past 25 years. Earlier this year the price of maize (corn) exceeded $175 a tonne, again a world record. It has fallen from its peak, as has that of wheat, but at $150 a tonne is still 50% above the average for 2006.

 

As the price of one crop shoots up, farmers plant it to take advantage, switching land from other uses. So a rise in wheat prices has knock-on effects on other crops. Rice prices have hit records this year, although their rise has been slower. The Economist's food-price index is now at its highest since it began in 1845, having risen by one-third in the past year.

 

Normally, sky-high food prices reflect scarcity caused by crop failure. Stocks are run down as everyone lives off last year's stores. This year harvests have been poor in some places, notably Australia, where the drought-hit wheat crop failed for the second year running. And world cereals stocks as a proportion of production are the lowest ever recorded. The run-down has been accentuated by the decision of large countries (America and China) to reduce stocks to save money.

 

Yet what is most remarkable about the present bout of “agflation” is that record prices are being achieved at a time not of scarcity but of abundance. According to the International Grains Council, a trade body based in London, this year's total cereals crop will be 1.66 billion tonnes, the largest on record and 89m tonnes more than last year's harvest, another bumper crop. That the biggest grain harvest the world has ever seen is not enough to forestall scarcity prices tells you that something fundamental is affecting the world's demand for cereals.

 

The meat of the question

 

Two things, in fact. One is increasing wealth in China and India. This is stoking demand for meat in those countries, in turn boosting the demand for cereals to feed to animals. The use of grains for bread, tortillas and chapattis is linked to the growth of the world's population. It has been flat for decades, reflecting the slowing of population growth. But demand for meat is tied to economic growth (see chart 1) and global GDP is now in its fifth successive year of expansion at a rate of 4%-plus.

 

 

Higher incomes in India and China have made hundreds of millions of people rich enough to afford meat and other foods. In 1985 the average Chinese consumer ate 20kg (44lb) of meat a year; now he eats more than 50kg. China's appetite for meat may be nearing satiation, but other countries are following behind: in developing countries as a whole, consumption of cereals has been flat since 1980, but demand for meat has doubled.

 

Not surprisingly, farmers are switching, too: they now feed about 200m-250m more tonnes of grain to their animals than they did 20 years ago. That increase alone accounts for a significant share of the world's total cereals crop. Calorie for calorie, you need more grain if you eat it transformed into meat than if you eat it as bread: it takes three kilograms of cereals to produce a kilo of pork, eight for a kilo of beef. So a shift in diet is multiplied many times over in the grain markets. Since the late 1980s an inexorable annual increase of 1-2% in the demand for feedgrains has ratcheted up the overall demand for cereals and pushed up prices.

 

Because this change in diet has been slow and incremental, it cannot explain the dramatic price movements of the past year. The second change can: the rampant demand for ethanol as fuel for American cars. In 2000 around 15m tonnes of America's maize crop was turned into ethanol; this year the quantity is likely to be around 85m tonnes. America is easily the world's largest maize exporter—and it now uses more of its maize crop for ethanol than it sells abroad.

 

Ethanol is the dominant reason for this year's increase in grain prices. It accounts for the rise in the price of maize because the federal government has in practice waded into the market to mop up about one-third of America's corn harvest. A big expansion of the ethanol programme in 2005 explains why maize prices started rising in the first place.

 

Ethanol accounts for some of the rise in the prices of other crops and foods too. Partly this is because maize is fed to animals, which are now more expensive to rear. Partly it is because America's farmers, eager to take advantage of the biofuels bonanza, went all out to produce maize this year, planting it on land previously devoted to wheat and soyabeans. This year America's maize harvest will be a jaw-dropping 335m tonnes, beating last year's by more than a quarter. The increase has been achieved partly at the expense of other food crops.

 

This year the overall decline in stockpiles of all cereals will be about 53m tonnes—a very rough indication of by how much demand is outstripping supply. The increase in the amount of American maize going just to ethanol is about 30m tonnes. In other words, the demands of America's ethanol programme alone account for over half the world's unmet need for cereals. Without that programme, food prices would not be rising anything like as quickly as they have been. According to the World Bank, the grain needed to fill up an SUV would feed a person for a year.

 

America's ethanol programme is a product of government subsidies. There are more than 200 different kinds, as well as a 54 cents-a-gallon tariff on imported ethanol. That keeps out greener Brazilian ethanol, which is made from sugar rather than maize. Federal subsidies alone cost $7 billion a year (equal to around $1.90 a gallon).

 

In theory, what governments mandate, they can also scrap. But that seems unlikely with oil at the sort of price that makes them especially eager to promote alternative fuels. Subsidies might be trimmed, of course, reducing demand occasionally; this is happening a bit now. And eventually, new technologies to convert biomass to liquid fuel will replace ethanol—but that will take time. For the moment, support for the ethanol programme seems secure. Hillary Clinton and John McCain used to be against ethanol subsidies, but have changed their minds. Russia and Venezuela are not the only countries that like to meddle in food markets for political reasons.

 

So demand for grain will probably remain high for a while. Demand, though, is only one side of the equation. Supply forms the other. If there is a run of bumper harvests, prices will fall back; if not, they will stay high.

 

Harvests can rise only if new land is brought into cultivation or yields go up. This can happen fairly quickly. The world's cereal farmers responded enthusiastically to price signals by planting more high-value crops. And so messed-up is much of the rich world's farming systems that farmers in the West have often been paid not to grow crops—something that can easily be reversed, as happened this year when the European Union suspended the “set aside” part of its common agricultural policy. Still, there are limits to how much harvests can be expanded in the short term. In general, says a new report by the International Food Policy Research Institute (IFPRI), which is financed by governments and development banks, the response tends to be sticky: a 10% rise in prices yields a 1-2% increase in supply.

 

In the longer run, plenty of new farmland could be ploughed up and many technological gains could be had. But much of the new land is in remote parts of Brazil, Russia, Kazakhstan, the Congo and Sudan: it would require big investments in roads and other infrastructure, which could take decades—and would often lead to the clearing of precious forest. Big gains could be had if genetically modified foods were brought into production or if new seed varieties were planted in Africa. But again, that will take time. Moreover, GM foods will not live up to their promise unless they shed the popular suspicion that dogs them, especially in Europe. And some of the new land—dry, marginal areas of Africa, Brazil and Kazakhstan—could be vulnerable to damage from global warming. By some measures, global warming could cut world farm output by as much as one-sixth by 2020. No less worryingly, high oil prices would depress the use of oil-based fertilisers, which have been behind much of the increase in farm production during the past half-century.

 

It is risky to predict long-run trends in farming—technology in particular always turns out unexpectedly—but most forecasters conclude from these conflicting currents that prices will stay high for as much as a decade. Because supplies will not match increases in demand, IFPRI believes, cereal prices will rise by between 10% and 20% by 2015. The UN's Food and Agriculture Organisation's forecast for 2016-17 is slightly higher. Whatever the exact amount, this year's agflation seems unlikely to be, as past rises have been, simply the upward side of a spike.

 

 

 

If prices do not fall back, this will mark a break with the past. For decades, prices of cereals and other foods have been in decline, both in the shops and on world markets. The IMF's index of food prices in 2005 was slightly lower than it had been in 1974, which means that in real terms food prices fell during those 30 years by three-quarters (see chart 2). In the 1960s food (including meals out) accounted for one-quarter of the average American's spending; by 2005 the share was less than one-seventh.

 

In other words, were food prices to stay more or less where they are today, it would be a radical departure from a past in which shoppers and farmers got used to a gentle decline in food prices year in, year out. It would put an end to the era of cheap food. And its effects would be felt everywhere, but especially in countries where food matters most: poor ones.

 

A blessing and a curse

If you took your cue from governments, you would conclude that dearer food was unequivocally a bad thing. About a score of countries have imposed food-price controls of some sort. Argentina, Morocco, Egypt, Mexico and China have put restraints on domestic prices. A dozen countries, including India, Vietnam, Serbia and Ukraine, have imposed export taxes or limited exports. Argentina and Russia have done both. In all these places governments are seeking to shelter their people from food-price rises by price controls. But dearer food is not a pure curse: it produces winners as well as losers.

 

Obviously, farmers benefit—if governments allow them to keep the gains. In America, the world's biggest agricultural exporter, net farm income this year will be $87 billion, 50% more than the average of the past ten years. The prairie farmers of the Midwest are looking forward to their Caribbean cruises.

 

Other beneficiaries are in poor countries. Food exporters such as India, South Africa and Swaziland will gain from increased export earnings. Countries such as Malawi and Zimbabwe, which used to export food but no longer do so, also stand to gain if they can boost their harvests. Given that commodity prices have been falling for so long in real terms, this would be an enormous relief to places that have suffered from a relentless decline in their terms of trade.

 

In emerging markets an income gap has opened up between cities and countryside over the past few years. As countries have diversified away from agriculture into industry and services, urban wages have outstripped rural ones. Income inequality is conventionally measured using a scale running from zero to one called the Gini coefficient. A score of 0.5 is the mark of a highly unequal society. The Asian Development Bank reckons that China's Gini coefficient rose from 0.41 in 1993 to 0.47 in 2004. If farm incomes in poor countries are pushed up by higher food prices, that could mitigate the growing gap between city and countryside. But will it?

 

Guess who loses

 

According to the World Bank, 3 billion people live in rural areas in developing countries, of whom 2.5 billion are involved in farming. That 3 billion includes three-quarters of the world's poorest people. So in principle the poor overall should gain from higher farm incomes. In practice many will not. There are large numbers of people who lose more from higher food bills than they gain from higher farm incomes. Exactly how many varies widely from place to place.

 

Among the losers from higher food prices are big importers. Japan, Mexico and Saudi Arabia will have to spend more to buy their food. Perhaps they can afford it. More worryingly, some of the poorest places in Asia (Bangladesh and Nepal) and Africa (Benin and Niger) also face higher food bills. Developing countries as a whole will spend over $50 billion importing cereals this year, 10% more than last.

 

Rising prices will also hurt the most vulnerable of all. The World Food Programme, the main provider of emergency food aid, says the cost of its operations has increased by more than half in the past five years and will rise by another third in the next two. Food-aid flows have fallen to their lowest level since 1973.

 

In every country, the least well-off consumers are hardest hit when food prices rise. This is true in rich and poor countries alike but the scale in the latter is altogether different. As Gary Becker, a Nobel economics laureate at the University of Chicago, points out, if food prices rise by one-third, they will reduce living standards in rich countries by about 3%, but in very poor ones by over 20%.

 

Not all consumers in poor countries are equally vulnerable. The food of the poor in the Andes, for example, is potatoes; in Ethiopia, teff: neither is traded much across borders, so producers and consumers are less affected by rising world prices. As the World Bank's annual World Development Report shows, the number of urban consumers varies from over half the total number of poor in Bolivia, to about a quarter in Zambia and Ethiopia, to less than a tenth in Vietnam and Cambodia.

 

But overall, enormous numbers of the poor—both urban and landless labourers—are net buyers of food, not net sellers. They have already been hard hit: witness the riots that took place in Mexico over tortilla prices earlier this year. According to IFPRI, the expansion of ethanol and other biofuels could reduce calorie intake by another 4-8% in Africa and 2-5% in Asia by 2020. For some countries, such as Afghanistan and Nigeria, which are only just above subsistence levels, such a fall in living standards could be catastrophic.

 

So it is no good saying “let them eat cake”: there are strong welfare arguments for helping those who stand to lose. But the way you do it matters. In general, it is better to subsidise poor peoples' incomes, rather than food prices: this distorts price signals the least and allows farmers to benefit from higher prices. Where it is not possible to subsidise incomes (because to do so requires a decent civil service), it is still possible to minimise the unintended consequences if food subsidies are targeted and temporary. Morocco fixed bread prices (the food of the poor) during Ramadan, the Muslim month of fasting; at the same time, it cut tariffs on food imports to increase competition.

 

AP But a problem too
 

In contrast, Russia shows how not to do it. It imposed across-the-board price controls on milk, eggs, bread and other staples, benefiting everyone whether they needed help or not. Food is disappearing from shelves and farmers are bearing the brunt. As Don Mitchell of the World Bank points out, “if you want to help consumers, you can do it without destroying your producers but only if you go about it in the right way.” In reality, many of the recent price controls are blatant politicking. About half the countries that imposed price controls did so before elections or other big political events. Russia's are due to run out just after next year's presidential election. Funny, that.

 

There is one last important knock-on effect of agflation. It is likely to help shift the balance of power in the world economy further towards emerging markets. Higher food prices have increased inflation around the world, but by different amounts in different countries. In Europe and America food accounts for only about one-tenth of the consumer-price index, so even though food prices in rich countries are rising by around 5% a year, it has not made a big difference. There have been clucks of concern from the European Central Bank and a consumer boycott of pasta in Italy, but that is about all.

 

In poor countries, in contrast, food accounts for half or more of the consumer-price index (over two-thirds in Bangladesh and Nigeria). Here, higher food prices have had a much bigger impact. Inflation in food prices in emerging markets nearly doubled in the past year, to 11%; meat and egg prices in China have gone up by almost 50% (although that is partly because pork prices have been pushed up by a disease in pigs). This has dragged up headline inflation in emerging markets from around 6% in 2006 to over 8% now. In many countries, inflation is at its highest for a decade.

 

Central bankers are determined to ensure that what could be a one-off shift in food prices does not create continuing inflation by pushing up wages or creating expectations of higher prices. So they are tightening monetary policy. China increased interest rates in August, Chile in July, Mexico in May. The striking thing about these rises is that they are the opposite of what has been happening in some rich countries. The Federal Reserve reduced rates by 50 basis points in September and 25 points in October; the Bank of Canada cut rates this week. The indirect effect of food-price rises has therefore been to widen the interest-rate differential between rich and emerging markets.

 

And all this is going on as the economic balance of power is shifting. Growth in America and Europe is slowing; China and India are going great guns. Financial confidence in the West has been shaken by the subprime-mortgage crisis; capital flows into emerging markets are setting records.

 

This shift will be tricky to handle. Such transitions always are. The risk is of a bubble in emerging markets. As Simon Johnson, the IMF'S director of research, wryly notes, “every bubble starts with a change in the real economy.” Food markets are an obvious place to start. How emerging countries fare—and how poor consumers cope—depends on their economic policies. The imposition of food-price controls was not exactly a good start.

 

 

read more...

 

 

The end of cheap food

Dec 6th 2007 

Rising food prices are a threat to many; they also present the world with an enormous opportunity

 

FOR as long as most people can remember, food has been getting cheaper and farming has been in decline. In 1974-2005 food prices on world markets fell by three-quarters in real terms. Food today is so cheap that the West is battling gluttony even as it scrapes piles of half-eaten leftovers into the bin.

 

That is why this year's price rise has been so extraordinary. Since the spring, wheat prices have doubled and almost every crop under the sun—maize, milk, oilseeds, you name it—is at or near a peak in nominal terms. The Economist's food-price index is higher today than at any time since it was created in 1845 (see chart). Even in real terms, prices have jumped by 75% since 2005. No doubt farmers will meet higher prices with investment and more production, but dearer food is likely to persist for years (see article). That is because “agflation” is underpinned by long-running changes in diet that accompany the growing wealth of emerging economies—the Chinese consumer who ate 20kg (44lb) of meat in 1985 will scoff over 50kg of the stuff this year. That in turn pushes up demand for grain: it takes 8kg of grain to produce one of beef.

 

But the rise in prices is also the self-inflicted result of America's reckless ethanol subsidies. This year biofuels will take a third of America's (record) maize harvest. That affects food markets directly: fill up an SUV's fuel tank with ethanol and you have used enough maize to feed a person for a year. And it affects them indirectly, as farmers switch to maize from other crops. The 30m tonnes of extra maize going to ethanol this year amounts to half the fall in the world's overall grain stocks.

 

Dearer food has the capacity to do enormous good and enormous harm. It will hurt urban consumers, especially in poor countries, by increasing the price of what is already the most expensive item in their household budgets. It will benefit farmers and agricultural communities by increasing the rewards of their labour; in many poor rural places it will boost the most important source of jobs and economic growth.

 

Although the cost of food is determined by fundamental patterns of demand and supply, the balance between good and ill also depends in part on governments. If politicians do nothing, or the wrong things, the world faces more misery, especially among the urban poor. If they get policy right, they can help increase the wealth of the poorest nations, aid the rural poor, rescue farming from subsidies and neglect—and minimise the harm to the slum-dwellers and landless labourers. So far, the auguries look gloomy.

 

In the trough

That, at least, is the lesson of half a century of food policy. Whatever the supposed threat—the lack of food security, rural poverty, environmental stewardship—the world seems to have only one solution: government intervention. Most of the subsidies and trade barriers have come at a huge cost. The trillions of dollars spent supporting farmers in rich countries have led to higher taxes, worse food, intensively farmed monocultures, overproduction and world prices that wreck the lives of poor farmers in the emerging markets. And for what? Despite the help, plenty of Western farmers have been beset by poverty. Increasing productivity means you need fewer farmers, which steadily drives the least efficient off the land. Even a vast subsidy cannot reverse that.

 

With agflation, policy has reached a new level of self-parody. Take America's supposedly verdant ethanol subsidies. It is not just that they are supporting a relatively dirty version of ethanol (far better to import Brazil's sugar-based liquor); they are also offsetting older grain subsidies that lowered prices by encouraging overproduction. Intervention multiplies like lies. Now countries such as Russia and Venezuela have imposed price controls—an aid to consumers—to offset America's aid to ethanol producers. Meanwhile, high grain prices are persuading people to clear forests to plant more maize.

 

Dearer food is a chance to break this dizzying cycle. Higher market prices make it possible to reduce subsidies without hurting incomes. A farm bill is now going through America's Congress. The European Union has promised a root-and-branch review (not yet reform) of its farm-support scheme. The reforms of the past few decades have, in fact, grappled with the rich world's farm programmes—but only timidly. Now comes the chance for politicians to show that they are serious when they say they want to put agriculture right.

 

Cutting rich-world subsidies and trade barriers would help taxpayers; it could revive the stalled Doha round of world trade talks, boosting the world economy; and, most important, it would directly help many of the world's poor. In terms of economic policy, it is hard to think of a greater good.

 

Where government help is really needed

Three-quarters of the world's poor live in rural areas. The depressed world prices created by farm policies over the past few decades have had a devastating effect. There has been a long-term fall in investment in farming and the things that sustain it, such as irrigation. The share of public spending going to agriculture in developing countries has fallen by half since 1980. Poor countries that used to export food now import it.

 

Reducing subsidies in the West would help reverse this. The World Bank reckons that if you free up agricultural trade, the prices of things poor countries specialise in (like cotton) would rise and developing countries would capture the gains by increasing exports. And because farming accounts for two-thirds of jobs in the poorest countries, it is the most important contributor to the early stages of economic growth. According to the World Bank, the really poor get three times as much extra income from an increase in farm productivity as from the same gain in industry or services. In the long term, thriving farms and open markets provide a secure food supply.

 

However, there is an obvious catch—and one that justifies government help. High prices have a mixed impact on poverty: they hurt anyone who loses more from dear food than he gains from a higher income. And that means over a billion urban consumers (and some landless labourers), many of whom are politically influential in poor countries. Given the speed of this year's food-price rises, governments in emerging markets have no alternative but to try to soften the blow.

 

Where they can, these governments should subsidise the incomes of the poor, rather than food itself, because that minimises price distortions. Where food subsidies are unavoidable, they should be temporary and targeted on the poor. So far, most government interventions in the poor world have failed these tests: politicians who seem to think cheap food part of the natural order of things have slapped on price controls and export restraints, which hurt farmers and will almost certainly fail.

 

Over the past few years, a sense has grown that the rich are hogging the world's wealth. In poor countries, widening income inequality takes the form of a gap between city and country: incomes have been rising faster for urban dwellers than for rural ones. If handled properly, dearer food is a once-in-a-generation chance to narrow income disparities and to wean rich farmers from subsidies and help poor ones. The ultimate reward, though, is not merely theirs: it is to make the world richer and fairer.

 

 

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