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About the coming large rise in food prices

12 November 2010

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.  Also see part two in this series:  More about rising food prices (perhaps one of the big trends of the next decade).

What result do you expect from this combination of factors?

  1. Rising demand for the product.
  2. Inability to increase the key inputs.  All that can be done is investment more into equipment and technology.
  3. Low stockpiles
  4. Low prices (near record low real prices)
  5. Adverse production environment (bad external factors)
  6. Now square the circle:  what will balance supply and demand?
  7. 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.

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:

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)

For more information

See the reference page Food – articles about this global crisis.  See these posts about food:

  1. Important news about the global food crisis!, 1 April 2008
  2. A view from Indonesia of the food crisis, 3 April 2008
  3. Stratfor warns about the global food crisis, 18 April 2008
  4. What you probably do not know about China’s food crisis, 21 April 2008
  5. Higher food prices, riots, shortages – what is going on?, 29 April 2008
  6. A modest proposal for solving the global food crisis, 30 April 2008
  7. Weekend reading about the Food Crisis, 17 May 2008
  8. Teach a man to fish, and you understand what we have done wrong in Haiti, 23 May 2008
  9. “Food scares are exaggerated, but good copy for the media”, 28 May 2008
  10. Is global food production peaking?, 13 January 2010
  11. Fertilizer overuse destroying Chinese soil, 18 February 2010
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One Comment leave one →
  1. 18 November 2010 4:16 pm

    Food Outlook“, UN Food and Agriculture Organization, November 2010 — Excerpt from summary (bold emphasis added):

    … following a series of unexpected downward revisions to crop forecasts in several major producing countries, world prices have risen alarmingly and at a much faster pace than in 2007/08. Attention is now turning to plantings for the next (2011/12) marketing season. Given the expectation of falling global inventories, the size of next year’s crops will be critical in setting the tone for stability in international markets. For major cereals, production must expand substantially to meet utilization and to reconstitute world reserves and farmers are likely to respond to the prevailing strong prices by expanding plantings. Cereals, however, may not be the only crops farmers will be trying to produce more of, as rising prices have also made other commodities attractive to grow, from soybeans to sugar and cotton. This could limit individual crop production responses to levels that would be insufficient to alleviate market tightness.

    Against this backdrop, consumers may have little choice but to pay higher prices for their food. With the pressure on world prices of most commodities not abating, the international community must remain vigilant against further supply shocks in 2011 and be prepared.

    Also note the special feature: “Wheat Rust: A growing threat to world food security.” (p 61)

    Like

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