About the coming large rise in food prices
12 November 2010
by Fabius Maximus
Summary: Rising food prices might be one of the most important geopolitical trends of the decade. This is another post in a series, describing the causes and effects; links to other chapters appear at the end.
What result do you expect from this combination of factors?
Rising demand for the product.
Inability to increase the key inputs. All that can be done is investment more into equipment and technology.
Low prices (near record low real prices)
Adverse production environment (bad external factors)
Now square the circle: what will balance supply and demand?
For more information
The subject is food, growing crops. The answer to the question in bullet #6: rising prices. Managing this almost inevitable trend might be one of the major challenges during the next decade.
(1) Rising demand
Incomes are rising rapidly in the emerging nations. From “ The Rise of Asia’s Middle Class“, Asian Development Bank (2010):
Developing Asia’s middle class has increased rapidly in size and purchasing power as strong economic growth in the past two decades has helped reduce poverty significantly and lift previously poor households into the middle class. By 2008, it had risen to 56% of the population — or nearly 1.9 billion people — up from 21% in 1990, using an absolute definition of per capita consumption of $2– $20 per day (based on survey data in 2005 PPP $); expenditures had increased almost three-fold, compared to more marginal increases in all other regional economies in the OECD.
As people rise from poverty they increase their consumption of food. More calories, especially more meat. Hence the rising demand for food, a sign of the fantastic progress of the world happening right now (often lost in the whining from the developed nations).
(2) Little or no ability to increase inputs of land or water
This has been well-discussed, and so will not be discussed here. Water supplies might decrease, especially due to over-exploitation of underground reservoirs. Farmland might likewise decrease due to desertification (i.e., poor land management), urbanization, and gross misuse (see Fertilizer overuse destroying Chinese soil). For more about exhaustion of groundwater see: Bad news for India, probably for China, perhaps for the US as well, 11 September 2009.
(3) Low stockpiles
Many nations built large stockpiles of grain and other food products (i.e., cheese) during the 1970′s, both to boost prices and as a response to the post-WWII global cooling (see here for more information). That was a prudent strategy, recommended in Stephen Henry Schneider’s great book The Genesis strategy: Climate and Global Survival (1976). They’re mostly gone now, like last year’s snow. Most nations per-capita grain stockpiles are at multi-generational lows.
Now any shocks from weather or disease will quickly create shortfalls. As we saw in 2008, people get upset when there’s not enough food.
(4) Low prices
Prices are low in real terms, reaching record lows around 2005, perhaps the lowest since the invention of agriculture. Prices in gold are a good proxy for long-term real prices, as shown at New World Economics , the website of Nathan Lewis – author of Gold: The Once and Future Money (2007).
(5) Adverse production circumstance: weather
Cooling in the 1970′s prompted fears of long-term shortages, even famine. Note: there was concern, but not a consensus that cooling was certain. See here for a full set of references.
“Potential Implications of Trends in Population Growth, Food Production, and Climate”, CIA, August 1974
“ Global Cooling and the Cold War – And a Chilly Beginning for the United States’ Climate Analysis Center?“, Robert W. Reeves, Daphne Gemmill, Robert E. Livezey, and James Laver (all of NOAA) — Presented at The International Commission on History of Meteorology Conference in Weilheim Germany, 5-9 July 2004
“ The Origins of a ‘diagnostics climate center“, Robert W. Reeves and Daphne Gemmill (NOAA), 20 October 2004 — Looks like slides from the above presentation.
The cool 1970′s were followed by a warming cycle, which might (might!) be changing to cooling cycle. First, the ENSO might be flipping from El Nino to La Nina dominated cycles (warm to cold). In general crops like the former more than the latter. Second, the sun might be entering a period of low activity — which might lower Earth’s temperature, at least in the northern hemisphere (the physical mechanisms are unknown). For more about this see:
“ Are Sunspots Different During This Solar Minimum?“, William Livingston and Matthew Penn, EOS (of the American Geophysical Union), 28 July 2009
“ Say goodbye to sunspots“, Science magazine website (AAAS), 14 September 2010
The study: “ Long-term Evolution of Sunspot Magnetic Fields“, Matthew Penn and William Livingston (National Solar Observatory), submitted to International Astronomical Union Symposium #273, 3 September 2010
Also see sections 5 and 6 on the Climate Science reference page.
Discussion of this lies beyond the scope of this article, but it deserves close attention.
(6) Squaring the circle: what will balance supply and demand?
Fixed or even decreasing land and water meet increasing demand. What happens then? Prices rise, destroying demand and spurring increased production. Demand for food is very inelastic (i.e., insensitive to prices). So production must adjust, as prices spur increased investments that increase output. Better seeds, better equipment, more fertilizer – all can boost global yields. Compare yields (in Hg/Ha) from the FAO website:
European Union Cereals,Total 52,141
Least Developed Countries Cereals,Total 17,689
World Cereals,Total 35,393
Northern America Cereals,Total 59,333
And over decades technology will work its usual magic. But small price increases will not do the job. And large increases will have destabilizing effects in many emerging nations. Even the brief increases in 2008 sparked riots. Interesting times lie ahead, although it will all work out in the end. But the path will be much smoother if we act now, rather than stumble our way into the future.
“In the long run we are all dead. Economists set themselves too easy, too useless a task if, in tempestuous seasons, they can only tell us that when the storm is long past the ocean is flat again.”
— John Maynard Keynes in A Tract on Monetary Reform (1923)