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More about rising food prices (perhaps one of the big trends of the next decade)

13 November 2010

Summary:   Readers of the FM website respond to its contents with a flood of comments (emailed or using the comment form).  Mostly critical, appropriate to it content — speculation about the topics on the edge of the known.  Some brilliant.  Some illustrate why America might have a very difficult time in the coming years.  Here we discuss responses to About the coming large rise in food prices.  Links to more information appear at the end.

Yesterday’s article predicted a high likelihood of rising food prices:  “Managing this almost inevitable trend might be one of the major challenges during the next decade.”  Here are some of the questions and comments submitted by readers.

  1. “The possibility of food shortages is reflected in their futures prices. That’s all you need to look at.”
  2. “We have buffers against food shortages.  Increasing food prices could save the West from diabetes and obesity.  Also, suburban land could be used? All those McMansion backyards add up!”
  3. “Does the self-inflicted higher priced food (organic, local) have any role in your analysis?”
  4. “We can farm and ranch more at sea.”
  5. “Famine!”
  6. Update:  retail food prices have not yet started to rise

Here are replies to each of these.

(1)  “The possibility of food shortages is reflected in their futures prices.  That’s all you need to look at.”

Here we see the result of intensive conservative propaganda, teaching a faux version of economics.  A fetish-like over-confidence in markets, ungrounded in history or theory.  Very pleasing to the corporatist elements seeking to rollback regulations protecting workers and the environment — and especially to prevent regulations limiting the government-protected financial sector that has periodically threatened to capsize the US economy during the past four decades.

Why is this not so?  First, consider the major factors driving agricultural futures prices (extending out to a practical maximum of 3 years).  None of these are affected to a significant degree by the long-term factors described in yesterday’s articles.

  • the current balance between supply and demand, expressed in the spot price
  • the availability and cost of storage
  • hedging of prices by producers (i.e., agri-corps plus farmers) and consumers (e.g., General Mills)
  • interest rates (i.e., the financing cost of holding stockpiles)

Second, have commodity futures predicted past large, long-term changes in prices?  Not often.  Futures are driven by consensus wisdom, which usually remains astonishingly blind to change.  To take one of many historic examples, consider the oil shocks of the 1970’s.  A few experts saw it coming, as US production peaked while demand increased.  Yet even they were surprised at its timing and magnitude; the general public experienced shock and awe.

The 1970 Cabinet Task Force report “A report on the relationship of oil imports to that national security” clearly described the threat. But its conclusions were far too optimistic.

  • “although we cannot exclude the possibility, we do not predict a substantial price rise in world oil over the coming decade” (page 403)
  • It forecast that U.S. oil imports (crude and products) would reach 5 million (27% of forecast demand) by 1980. In fact, imports exceeded that by January 1973 (5.9 mbd, per the EIA).

Experts at the State Department were among the few sounding alarms about the coming oil crisis, as described by their chief expert, James E. Akins, in “The Oil Crisis: This Time the Wolf Is Here” (Foreign Affairs, April 1973):

These figures were not immediately accepted as a new insight; they were, in fact, attacked as alarmist or provocative when first made public. And the Department’s sins were compounded by its making public, during 1970, an estimate that oil prices in the Persian Gulf (then somewhat less than $2.00 per barrel) would rise by 1980 to … $4.50.

His estimate was far too low; in January 1978 the prices was aprox $12-13 per barrel.  However Akins presciently warned about the ability of Middle East oil producers to use their leverage — as we discovered six months later during the October 1973 Oil Boycott.

“{T}he threat to use oil as a political weapon must be taken seriously. The vulnerability of the advanced countries is too great and too plainly evident-and is about to extend to the United States.”

(2)  “What about the response of rich nations to rising food prices?”

“We have buffers against food shortages.  Increasing food prices could save the West from diabetes and obesity.  Also, suburban land could be used? All those McMansion backyards add up!   If there was some sort of supply chain that could work with this diffuse land, we could get a lot more veggies.”

That would be a win-win response.  But it’s not likely.  Food price increases affect the poor far more than the affluent, and most people in the US are affluent compared to the rest of the world.  The poor either change their behavior (spending more on food, less on other essentials) or reduce their consumption.  The affluent keep their consumption the same, either shifting to lower-quality foods or just paying more. 

We can do that in the US because food is only 15% of spending ( roughly, using the Dept of Labor’s urban CPI).   So we’re unlikely to make large-scale changes, becoming leaner or plowing up suburban land to tend 21st century victory gardens.  But the poor and blue collar workers might seek to increase their working hours, to increase income.

Two other factors.

  • Raw agriculture products comprise a small fraction of the price for the foods we eat.  Consider a simple product, like corn flakes.  Less than 1/10 of the box’s weight is corn; roughly 1/20 of the cost is corn (the rest is shipping, manufacturing, marketing, etc).
  • Rising agriculture prices might be partially offset by reduced government subsidies.

(3)  “Does the self-inflicted higher priced food (organic, local) have any role in your analysis?”

The fascination of the rich (i.e., middle and upper class Americans) with their hobbies seldom reflects these things importance in the world.  The majority of the world’s people are interested in more calories (perhaps with a little meat) and clean water.  “Organic” and local food has little importance to them.  As do our fears of technological progress (e.g., nukes, genetically modified seeds, etc).

(4)  “We can farming and ranching more at sea. Wild harvesting has been devastating, but ranching could work.”

We will be fortunate if ranching can even maintain fish catches, considering the raping and pillaging of the world’s lakes, rivers, and seas.  See this post for links to articles about the devastation of world’s fisheries.

On a longer time horizon there will be social, political, and technological responses to higher food prices.  As there were to the higher oil prices in the 1970’s, stimulating conservation and new sources (a process still in its early stage).  Eventually high quality food will become abundant and inexpensive. 

Perhaps we will have ranches in the oceans, as in Arthur C. Clarke’s The Deep Range (1957).  Or farms, perhaps using iron fertilization.  Eventually we might even eat synthetic foods.  Esp meat, such as the genetically engineered “meatbeasts” in science fiction (see “A protein possibility for the post peak period: the meat beast“)

But the good fortune of future generations does nothing for us.  Good planning and strong action might be needed now, to get us through the next few decades with a minimum of suffering and social disruption.

(5)  “Famine!”

Even small imbalance between supply and demand forces prices up for goods like oil and food (i.e., low elasticity of demand with respect to price).  That does not imply famine, although there might be increased rates of malnutrition or even starvation among the world’s most poor.

Even without famine, rising food price can produce large social and political stresses in both developed and emerging nations.  As we saw in 2008; see the articles listed below for details.

(6)  Update:  retail food prices have not yet started to rise

Despite Sara Palin’s misinformation, retail food prices have not yet risen.  See this well-researched article at The Big Picture for details.

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
  12. About the coming large rise in food prices, 12 November 2010
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