Higher food prices, riots, shortages – what is going on?

Summary:  Many factors are driving up food prices, but the elephant in the room is global inflation. This explains why prices are rising throughout the entire commodity complex (energy, industrial materials, precious metals, agriculture).  Plus brief discussions of biofuels, long cycles of food prices, the role of government policy, and the likelihood of resource wars.

“Global Market Brief: Food Cost Crises”, Stratfor (13 March 2008) — Opening:

Global wheat prices rose by 83 percent at the outset of 2008 compared to 2007 prices. Soybean prices hit an all-time high of $14.22 a bushel in February, while corn prices rose to a 12-year high of $5.25 a bushel. The U.S. Department of Agriculture reports that global grain reserves have plummeted to the lowest level since 1960. Prices likely will not fall for some time; as a matter of fact, the International Food Policy Research Institute predicts that global cereal prices will be 10 to 20 percent higher by 2015.

I agree. We part company when it comes to the causes. (Bold emphasis added)

The recent rise in grain prices is mostly attributable to rising demand in large emerging economies – specifically, India and China – where the large middle class has an appetite for not only staple foods but meat and dairy products, which require land cultivation that offsets staple crop production. This, and the diversion of grain as animal feed, further increases the price of basic foodstuffs.

… Increased demand for biofuels is no small factor in rising prices, either. The International Grain Council has calculated that 6.5 percent of grain grown in the 2007-2008 agricultural season will be used to produce biofuel.

Supply constraints will exacerbate the problems resulting from increased demand. While new lands for agricultural production are being added in Russia and South America, agricultural lands in Asia and Europe are being diverted for residential and industrial uses. In China, desertification and development have led to a loss of more than 6 percent of the country’s arable land in the last decade, and this trend will not abate any time soon.

Furthermore, food is just one of the many commodities affected by soaring global energy prices.

All of these things are true, but they omit two factors. First, governments have allowed grain stockpiles to decrease for two decades, as demand rises — so the days inventory has crashed. Hence any short-term problems cause immediate shortages. Consider the annual rice carrover (from the 28 April issue of the always valuable “Gartman Letter”):

  • 2000-01 147 million tonnes, with global production of rice 399 million tonnes
  • 2001-02 133
  • 2002-03 104
  • 2003-04 082
  • 2004-05 074
  • 2005-06 078
  • 2006-07 076
  • 2007-08 077 million tonnes, with global production of rice 425 million tonnes

Second, there is an elephant in the room — but governments prefer to ignore it. The entire complex of commodities prices has been rising since aprox 2002. Energy (oil, natural gas, coal, uranium). Industrial metals (e.g., iron ore, copper). Precious metals (e.g., gold, silver). Agricultural products. Copper prices are not rising because of the UG99 wheat fungus; oil prices are not rising because of corn converted to ethanol. There must be a systemic cause at work.

Also, prices of imported manufactured goods are beginning to rise. This is a lagged result of the decline of the US dollar over the past five years.

Inflation

To oversimplify, rising prices in some sectors are an early stage (or symptom) of inflation. But they are not inflation. As Milton Friedman said, inflation is always and everywhere a monetary phenomenon. It depends on Central Bank policy, how they react to rising prices in the commodity sector. Easy monetary policy can cushion the shock. However, if we get rising wages (aka “wage inflation”), then rising prices spread through the economy. As in the 1970’s, during which real wages rose.

What happens If prices of commodities and imported goods continue to rise, but wages do not? We get deflation, as many households are unable to pay their bills and default on their loans. This contraction pushes businesses into bankruptcy, defaulting on their loans and firing their works. And so the effects ripple out through the economy.

Which is worse for a high-debt economy like ours, inflation or deflation? To grossly oversimplify… The 1970’s had the “great inflation”, a bad decade for America in many ways. The 1930’s had deflation, and was the great depression. The government has tools to fight inflation and deflation. However, success is not necessarily easy, painless, or guaranteed.

Will American wages rise to keep up with the cost of living? The government has powerful influence on monetary conditions, but there are other factors. Globalization acts to cap wages in industries exposed to foreign competition (e.g., manufacturing, software engineering, call centers). High rates of immigration caps wages for affected workers (low skilled workers, computer programmers, engineers). The net result might be that wages fail to rise with inflation. That could be painful for America.

It is not all about biofuels

Was the rioting in Tibet due to China’s Yak-to-ethanol program? Let’s check the experts for agreement on the role of biofuels in driving up food prices.  {quotes are from a report by Paul Schulte}

“Bio-fuels have only contributed about 10% of the current prices rise in food.”
— United Nation’s Food and Agriculture Organization

“There is no question that bio-fuels have a strong impact on corn prices.”
— Joseph Glauber, Chief Economist, US Department of Agriculture

“Rising Food prices have nothing to do with bio-fuels.”
— Angela Merkel, Chancellor, Germany

“I think bio-fuels are having an effect on food prices, and not a temporary one.”
— Shigeo Naruse, Director, Ministry of Trade, Japan

Although clearly more analysis is needed to determine the role of biofuels, prices are rising throughout the commodity complex — which implies there are systemic factors at work.

What about those food riots?

Most of the riots around the world result from rising prices for food, not insufficient supplies of food. Rising food prices make food unaffordable — in effect, unavailable — for the poor in 2nd and 3rd world nations. However, the specifics are quite complex. Food inflation to a large extent results from government policies. See these two posts for more information.

  1. Important news about the global food crisis!
  2. A view from Indonesia of the food crisis

What about reports of empty shelves around the world, even in America?

Inflation has a psychological component. Goods inventories have declined as memories fade of the 1970’s great inflation. One way in which inflation manifests itself is belief that tomorrow’s prices will be higher than today’s. The result is inventory building — hoarding –at all levels. Governments (export bans). Producers. Middlemen. Households. Panic buying can empty shelves in even the richest nations, whose people have the money to build large stockpiles.

We can count on the media to feed the flames: “Load Up the Pantry“, Wall Street Journal, 21 April 2008 — Opening:

I don’t want to alarm anybody, but maybe it’s time for Americans to start stockpiling food. No, this is not a drill.

You’ve seen the TV footage of food riots in parts of the developing world. Yes, they’re a long way away from the U.S. But most foodstuffs operate in a global market. When the cost of wheat soars in Asia, it will do the same here.

Reality: Food prices are already rising here much faster than the returns you are likely to get from keeping your money in a bank or money-market fund. And there are very good reasons to believe prices on the shelves are about to start rising a lot faster.

Panic by government and large corporations can easily exacerbate the hysteria. Note this comment about the shortages of rice in the US by Dennis Gartman in The Gartman Letter (25 April 2008) — plain speaking by a expert in the commodity trading markets.

However, the very public decisions by Costco and Wal-mart regarding rice is not just borderline idiotic, it is manifestly so; it is materially so; it is shockingly, stupidly, can-you-believe-how dumb-this-is so! There is no shortage of rice in the US. There is not about to be, although Costco and Wal-Mart have created a “run on the rice bank” by doing what they did.

No matter how foolish the rumors, how destructive the hysteria,

Will government policy make things better — or worse?

Governments react to inflation not by tackling the monetary causes – which is painful – but by attempting to mute the price signal (price controls, export bans). This is self-defeating, as such measures have many bad effects.

  1. Farmers have less motivation to increase production
  2. Depressing prices encourages everyone to hoard, for the day prices inevitably spike up
  3. Consumers have less incentive to curb use or shift from scarce foods to more abundant ones.

Government price distortions build upon distortions created by inflation itself.

Price signals are essential to change investment into production improvements, alternatives and efficiency gains. Inflation can distort the price/response signals causing over/under reaction to real events.

But these Government responses are logical and predictable. Every society is just 3 days away from revolution – which is what happens if food runs out or becomes unaffordable. Hard to talk about price signals when there are riots in the street, bit like talking about the value of aromatherapy when you are having a heart attack. A short term response like this is not really a big issue, provided it is only short term and then is followed by more reasoned and sensible responses (I note the idea by them for cooperation to raise food production, which is a very positive thing). Buying time is an ok tactic, provided it is only a short amount of time (if it becomes a long term policy then that’s another issue).

— Comment by Oldskeptic posted at What you probably do not know about China’s food crisis.

Long cycles

Commodity prices move in long cycles, driven by periods of underinvestment and over-investment. Commodity prices declined for two decades. Food prices are far lower than in the 1970’s, adjusted for inflation. The world has under-invested in agriculture for the past two decades, as it has in all four groups of commodities. This is common near the end of long economic expansions, during which

  • demand increases
  • stockpiles decline
  • surplus capacity decreases

Systems become unstable as they approach edges of their operating envelopes. Then even small disruptions — strikes, wars, weather — produce disproportionate ripples which immediately affect consumers. That means price volatility, both up and down — which makes planning difficult. Another quote from Oldskeptic:

For complex systems as utilisation approaches the maximum possible then efficiency drops and, very importantly, redundancy disappears. This means the system is now very vulnerable to even small disruptions in inputs, which can then cause much larger impacts on outputs than when utilisation was at a lower level.

Every system (biological, ecological, financial, etc) has a rate of adaption to environmental changes. Too rapid change can exceeds its capacity to adapt. Shortages and rising food prices are not an issue if they occur within the response time of our agricultural systems (i.e. 3-20 years) and our social systems (e.g., consumption patterns change).

The food issue has been around for a long time. I remember studies from the 70’s, 80’s and 90’s that predicted problems. The system has gone past maximum efficient utilisation. More and more inputs have led to lower and lower increases in outputs. Worse, arable land is disappearing (though drought, salinity, desertification, urban expansion, etc). So to even stay at the same level as (say) 20 years ago, more inputs have had to be pumped in, bringing forward the day of maximum efficient utilisation. R edundancy (spare land, stockpiles, etc) has disappeared over the last few years. So we have a system that is running flat out, well past its maximum efficiency and with little redundancy left for a perturbation.

What we are having now is a combination of disease (e.g., UG99 wheat fungus), increased cost of inputs (e.g., oil for fuel and fertilizer), drops in production (e.g, drought) on a system that has been very close to the limit for a while now. These minor input changes are having a much larger impact now than they would have had 20 years ago. Impacts are rippling from one food type to another. Wheat problems impact rye demand. Demand increases for basic foods impact meat production. And so on. Speculators jump on the bandwagon as well, adding a further positive reinforcement to the whole process. Countries are stopping their exports to feed their own people.

And so a new cycle begins.

Resource Wars

Perhaps there will be wars over resources. But perhaps not. The historical record does not strongly support the theory that resource scarcities increase violent conflicts. But wars are not the only bad effect of rising food prices, whatever the causes. A last quote from Oldskeptic:

Variability in food production (the cycles) in the past meant 2nd and 3rd world countries going hungry, as we in the rich countries out bid them for it (or even just take it as the British did to India in 1942, killing millions of Indians). For the 3rd world that is still true. But some of these countries can now bid with us for food, so that mechanism has gone for maintaining OUR cheap food supply.

For More Information

Impact of the food crisis on the world’s poor:

  1. Food squeeze feared as chance of U.S. drought seen“, Reuters (25 April 2008) — ” Iowa State University extension climatologist Elwynn Taylor said the corn belt has a one in three chance of drought this year.”
  2. The new economics of hunger“, Washington Post (27 April 2008) — “A brutal convergence of events has hit an unprepared global market, and grain prices are sky high. The world’s poor suffer most.”
  3. Rice price rise takes toll in Manila slum“, Los Angeles Times (27 April 2008) — ” staple moves out of reach for the poor amid expectations of shortages, increasing potential for unrest.”
  4. Shortages Threaten Farmers’ Key Tool: Fertilizer“, New York Times (30 April 2008)

Other posts about this subject:

  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

This archive shows all posts about the food crisis, plus reports from from major international agencies.

27 thoughts on “Higher food prices, riots, shortages – what is going on?

  1. Why not look at it as an opportunity.

    If the indication is that we are approaching a time of increased investment in the agricultural sector etc. to boost supplies, one could argue that this is a time to try and connect some of Thomas Barnett’s GAP countries to globalisation, in a small way.
    Invest in their agricultural sector rather than ours. GAP country leaders may not be hostile to improving their countries food supply. thereby reducing food riots and threats to their leadership. So Western companies etc may be met with open arms.

    And longer term it may reduce the classic 3rd world problem. “what can we sell”.

  2. Am I dreaming too wildly when I dream of a world in which OldSkeptic does a weekly guest column on this blog?
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    Fabius Maximus replies: Perhaps more appropriate would be to submit something to Defense and the National Interest, an online journal (aka blog) which publishes articles from many sources.

  3. “The historical record does not strongly support the theory that resource scarcities increase violent conflicts.” Citations please?

    Here are counter-citations:

    Geopolitics and the Limits of Growth“, John Gray, The Globalist (17 March 2004)

    Scarcity and Survival in Central America, William H. Durham, Stanford University Press (1979) — “Ecological Origins of the Soccer War”

    Resource Wars: The New Landscape of Global Conflict, Michael T Klare (2002)

    As an aside, I’ve always wondered whether the Korean War was partly driven by the US’s need for tungsten after the Mao’s victory in China turned off that supply.
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    Fabius Maximus replies: Three excellent citations! The first and third just restate the theory, with supporting reasoning and evidence. The second looks interesting, and I will put it on my reading list.

    Thank you for this information!

  4. For more information about the economic impact of commodities – from an investor’s viewpoint, read Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market by Jim Rogers.

    Several points:

    1) For approximately the last generation, Western economies, particularly the United States, have been able to control the price of commodities.

    2) The method they have used has been the complex financial instruments which have been the topic of so much recent discussion.

    3) QED: The rise of food, oil, and other commodity prices and the mortgage / financial meltdown are therefore fundamentally related. Essentially, each is the flip side of the other.

    4) Characterizing the Iraq War as being “about oil” is incorrect in the sense that oil is important not for its own sake but rather because it is the big, bad commodity. It is about more than oil – it is about commodities generally, for which oil is merely a bellwether.

    5) The complex financial instruments mentioned above depend upon regularity in the system. Terrorism is about injecting irregularity into th4e system. Therefore terrorism tends to weaken these instruments and, conversely, to strengthen commodities.

    6) Narcotics such as opium, cocaine,and marijuana happen also to be commodities.

    7) It is no coincidence that terrorist / guerilla hotspots happen to be in commodity producing regions.

    8) QED: the so-called “War on Terror” would be far better understood as the “Revolt of the Commodities” or “The War Against Commodities.”

    Note that the numbered points listed above are mine and not Jim Rogers’ – although Rogers’ book provides background information that would help to buttress many of my points.
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    Fabius Maximus replies: Interesting theory. I am not a fan of Rogers, although he has a great record as a trader. Note that discussion of investments is off topic for this blog — so no comments elaborating on that aspect of the issue, please.

  5. It’s all about fertilizers. The fertilizer industry will have a world-wide boom in the next years.

    I remember a recent article on Malawi, a South African state. Malawi followed the guidance of some international organisation (IWF, World Bank, something like this) and accordingly failed to produce enough food for its people. After some years of poor harvests the government decided to ignore the advisers and subsidized fertilizers. Next year they had a good harvest an the added value of agricultural production was higher than the overall costs for the fertilizer. Somehow the structures didn’t let the farmers invest into fertilizers on their own.

    I know someone who lived in Africa for many years and who would attribute this to malnutrition-caused lack of intellect.

    Anyway; if the developing countries would only close in on our fertilizer/hectare usage by few per cents, they’d easily have a drastic increase of their agricultural production. Much of the food production in Africa and Asia is subsistence economy, whereas the export cash crops production is better organized.

    This present food problem will go away in a couple of years while the troubles with soil quality, social structure disruptions and malnutrition will be modest, but last for decades.

    Btw, I see absolutely no relation to terrorism in this topic…
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    Fabius Maximus replies: I agree. The boom in fertilizer has already started, but has far to go. More capital expenditures, more and better inputs — many good things happen when the price of a good rises.

  6. Two factors are driving up food prices.

    One, oil and other commodities are priced in US dollars, and the dollar is collapsing. The rising price of oil raises costs for transporting other commodities, thus raising prices. But commodity prices, specifically oil and food prices, are rising much faster than the value of the US dollar is falling.

    Clearly another factor is at work here, and that second factor is speculation. Investors are abandoning banking stocks, securities, and municipal bonds, as the sub-prime crisis undermines their value. These investors have to put their money somewhere to earn a stable rate of return, so they are flooding the commodities markets.

    Witness the skyrocketing price of gold as the sub-prime meltdown unfolded. Oil was next, as new buyers for oil and gas futures sought a worldwide commodity that everyone needed. Now investors have discovered grain, corn, and rice futures.
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    Fabius Maximus replies: Did you actually read the post, and any of the links?
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    There are many factors at work. Rising energy prices can account for only a small fraction of the rise in food prices, and that fails to account for the broad nature of the price rises.
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    There is little evidence that speculation is a significant driver of prices. Prices are rising in regions were there are weak financial markets (e.g., Tibet’s yak meat and milk). There is hoarding, which is an inevitable result of inflation. Calling that “speculation” just diverts attention from the government policies which start and drive inflation.

  7. In addition to fertilizers, GM foods are becoming more appealing. These can decrease the need or increase the efficacy of fertilizers, herbicides, and/or insecticides. I have read recently — no link, sorry — that European and Asian resistance to GM foods is decreasing and they are increasing their imports of it.

    The key is the response time of our ag sectors to the problems. I suspect that there is an incremental solution and old skeptic’s window is low end extends down to a few months, because fertilizers are an important backstop with their more immediate yield impacts. Increased yield still requires waiting for harvest. GM seeds require being planted, obviously.

    This only takes care of the supply problem for an isolated, but important, commodity, one definite cause of rising prices.

    So how do you combat inflation during a credit crunch? Robbing Peter to pay Paul. Interest rates are pretty low in the US. Food price increases will increase supply where there is capacity. But unless this drives down prices, cost of living increases and upward wage pressure grows.

    Can’t we see inflation and deflation occurring simultaneously across multiple sectors? If it is extreme enough and in the right places, it is worse than either systemic inflation or deflation.
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    Fabius Maximus replies: Inflation and deflation are monetary phenomenon. Rising prices for any sector, or a few sectors are not inflation. The central bank’s response, among other factors, determines if price increases are contrained or spread to become inflation. The full explanation is beyond the scope of this blog, but understanding this is vital for accurate diagnosis and treatment of the current economic and geopolitical problems.
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    There are good textbook “cures” for inflation, but at a cost — esp. to economic growth. The treatment is often delayed from reluctance to pay the price; the delay usually means the price is higher than if started earlier.

  8. There’s a lot I agree with here, so I’ll skip that and go straight to the parts I’m not quite sure of.

    “Depressing prices encourages everyone to hoard, for the day prices inevitably spike up”

    I think the question here is whether the price level is perceived to be falling or rising long term. If falling, then what’s the rush? Buy what you need for today only, because your inventory will be a negative-return investment. If prices are perceived to be rising, then a short-term dip will probably lead to stockpiling.

    That said, I think we are on our way to a change in perception from level-declining real prices to level-rising ones and that will affect behavior in large ways.

    “Globalization acts to cap wages in industries exposed to foreign competition (e.g., manufacturing, software engineering, call centers). High rates of immigration caps wages for affected workers (low skilled workers, computer programmers, engineers). ”

    I used to outsource work to India, but stopped at the end of last year. It simply got too expensive. By the time all the costs were accounted for, each upper-middle-tier programmer was going to cost me $50k, and when we figured it all in, the ROI on local talent seemed better. If you are building teams in dozens or larger then there are still efficiencies to be found, but they are shrinking rapidly. H1B visas likewise are remaining capped at 65k annually, and they are all spoken for through the FY2009 authorization. I recall the number being twice as large 5-10 years ago.

    I think offshoring of interactive work is nearing its high-water mark, if it hasn’t already reached it. China and India had huge numbers of relatively-educated people who were kept out of the global economy by government policy. Sort of like the oil that bubbled to the surface in Pennsylvania back in the late 1800s. Manufacturing relies on a skillset that is sometimes narrower, but that restricts you to a relatively low-end type of work.
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    Fabius Maximus replies: Generalizing from one’s own experience is annec-data (i.e., annecdotal data), best used only to illustrate trends supported by real data. Howeve, as described in “Geopolitical implications of the current economic downturn“, I believe this down cycle will end with the US dollar declining to a point where jobs no longer flow overseas. The decline of the dollar to date has, of course, moved us quite a way in that direction.

  9. Here’s one cause I’ll wager you haven’t thought of: Cooler Climate. Recent shorter growing seasons and crop failures in Asia due to cooler wetter weather may be causing food shortages. Everyone has gotten used to the nice (for farmers) warm weather that we’ve had this last decade. Well the party may be over. Get ready for a decades long food shortage if the gobal weather stays as cool as it has been this year.

  10. According to Mike Davis in Planet of Slums, the modernization of agriculture in the Third World, by driving surplus rural populations off the land, has caused the massive growth of slums in Third World megacities.

    According to John Robb, these slums, in turn, are major incubators for global guerrilla activities. In any event, Hamas, Hexbollah, Sadr, and Ahmadinejad all have political ties to slums.

    I reached The Global Food Crisis… And The Ravenous System Of Capitalism after a brief Google Search.

    This article, which is anti-capitalist in its ideology, nevertheless cites certain developments which, whatever our ideiology, somehow must be explained:

    1. Industrialization of agriculture.
    2. Restructuring of agriculture in the Third World by Structural Adjustment Programs imposed by the International Monetary Fund (IMF) and the World Bank. (leading, among other things to displaced peasants migrating to megacity slums.)
    3. Production of biofuels.
    4. Financial speculation in agricultural commodities. Speculators buy, sell, and hoard current supplies of food.

    This article cites too many points for me to list them here. Even if one disagrees with its thesis that capitalism is the evil which has caused these problems while socialism is the cure, the facts it cites nevertheless require our attention; so the article is well worth reading in its entirety.

  11. Fabius, if you don’t want me to keep commenting on your weblog, just say so in reply to this post.

    Let’s think back to the “energy crisis” that paralyzed California in 2001. In December of 2000, California was paying $1400 for one megawatt-hour of electricity, compared to just $45 per hour a year earlier. These soaring prices caused rolling blackouts, bankrupted some California utilities, and forced the public to bailout others.

    As California was going bankrupt, pundits and talking heads were trying to figure out why energy prices were skyrocketing. Some media outlets blamed the internet boom, others sited a lack of alternative energy sources. Even wildfires, and a shortfall in water powering dams were attempts to explain the sudden surge in energy prices.

    This was all nonsense. The California energy crisis was caused by the new energy derivatives market created by Enron and other energy trading companies. When FERC stepped in and re-regulated prices, the energy crisis disappeared.

    Now, food prices are skyrocketing, and people are scratching their heads trying to figure out why. Biodiesel, rising demand from India and China, I’ve even heard suggestions that since Asians are eating more meat, more grain is necessary for animal feed. Is there any evidence for an increase in biodiesel production that would double the price of grain? Are Chinese and Indian people purchasing twice as much grain as they did last year? And why not just grain, but rice, corn, and soybeans?

    It is more nonsense.

    What has changed since last year? The collapsing dollar is raising prices for oil and other commodities worldwide. In addition, the sub-prime mortgage meltdown has caused a flight from financial stocks and municipal bonds. Look at the plunge in the S&P since last year, and ask where did that money go? You don’t like the word “speculator”, fine, call it global capital seeking a higher rate of return.

    Food prices are being bid up by investors purchasing grain, rice, corn futures ect. As for non-globalized markets being subject to inflation, why not. If China is suffering from skyrocketing food prices, and Tibetan Yak milk can be bought by Chinese, then their prices will soar as well.

    If you need further proof that global speculators are responsible for surging food prices, India and Vietnam have banned rice exports. The Philippines has called on the World Bank to use “moral persuasion” to persuade nations to sell rice on the world market. The export bans are preventing global speculators from bidding up the price of this commodity.

    The question is, why should people who are buying food to eat have to compete with speculators seeking profits on food commodities?
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    Fabius Maximus replies: All are welcome here, assuming reasonable civility. Your posts are well reasoned and expressed, and certainly welcome. Everyone gets to state their views and disagree — you, me, and the everyone else — as none of us have a corner on the truth.
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    “The collapsing dollar is raising prices for oil and other commodities worldwide.” Yes, but that misses the point. Commodity prices are rising in terms of all currencies, not just the US dollar.
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    “Look at the plunge in the S&P since last year, and ask where did that money go?” When markets fall, capital is destroyed. It goes poof. There may have been net outflows, but the surging balances in money markets show where a large fraction of the funds probably went. Determining exactly where the money went is a difficult analytical task.
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    “Food prices are being bid up by investors purchasing grain, rice, corn futures ect. ” Prices are bid up by speculators who hold stockpiles. National and commercial stockpiles, so far as we can tell from published statistics, are falling — not rising. QED, speculation is probably not a major driver of prices.
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    “As for non-globalized markets being subject to inflation, why not. If China is suffering from skyrocketing food prices, and Tibetan Yak milk can be bought by Chinese, then their prices will soar as well.” That is not inflation, but a change in the supply/demand balance. I believe everyone knows this is taking place.
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    “If you need further proof that global speculators are responsible for surging food prices, India and Vietnam have banned rice exports.” What? This is hoarding, government-sanctioned hoarding. A natural response to belief prices will rise, and hence results from both scarcity and inflation. “The Philippines has called on the World Bank to use “moral persuasion” to persuade nations to sell rice on the world market.” Yep, consumers do not like producers who hoard (i.e., build stockpiles while prices rise).
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    “What has changed since last year?” This dynamics of inflation require looking at the larger picture. Commodity prices have been rising since 2002, as the early effects of monetary inflation began to manifest them. Energy, industrial materials, precious metals were the first affected. Agricultural products were just the last to rise. Something has to rise first; something had to rise last. Look at the graphs of commodity prices during the 1970’s — very similar.
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    With the passage of time, we can see the forces at work in the 1970’s. We can only guess now, but I believe the case is moderately strong for inflation as one of the major drivers of commodity prices.
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    “You don’t like the word “speculator” The label is not important, but the public policy implications of the diagnosis are vital. Hoarding is an inevitable response to the belief that prices will rise; it is fought by monetary policies that contain inflation. Speculation, in this context, is anti-social behavior that can be criminalized and restricted by the government. Since it is a mis-diagnosis — but a comfortable one by governments eager to ignore their role in the problem — it is common and usually fails.

  12. Check the other commodity prices – this is not only about rice, or food – many commodity prices are going up: International Commodity Prices.

    Speculators would focus on one or few markets.
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    Fabius Maximus replies: Agree. As I said, prices have been rising for several years in all four parts of the commodity complex: energy, industrial materials, precious metals, and now agriculture.

  13. Let me just comment on what I see out here. I’m a U.S. based truck owner operator. I spend most every day driving across this country. I spend hours driving across unused farm land, not the best land mind you, but usable. If we use our land, there’s enough room for food and bio-fuel production. Also while we are trying to plan the future, we are not addressing todays problems. The answer to what to do: increase production of known oil, tar sand, and oil shale reserves, develop electric cars, hybrid, hyrogen, or some new tech. Well the answer is yes.

    Not everything will work in the long run, but we need to be looking into all options. And while we are at it, lets not let perfect be the reason we dont get good.
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    Fabius Maximus replies: I strongly agree. I believe this will happen. It just takes time. Everything takes time.

  14. It seems strange that fertilizer costs so much money when so many nations dump sewage, which is just a little investment short of being the world’s best fertilizer! (Yes, some sewage has heavy metal contamination, etc., but permaculture is underutilized.) The world’s best tech is worthless without a manager to recognize its value and run a project that uses it.
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    Fabius Maximus replies: It is all about prices, expectations for future prices, and the time required to make the necessary capital investment (raise the money, design, get approvals, and build infrastructure). Prices change rapidly, the responses take time.

  15. “Fabius Maximus replies: Generalizing from one’s own experience is annec-data (i.e., annecdotal data), best used only to illustrate trends supported by real data. Howeve, as described in ‘Geopolitical implications of the current economic downturn,’ I believe this down cycle will end with the US dollar declining to a point where jobs no longer flow overseas. The decline of the dollar to date has, of course, moved us quite a way in that direction.”

    So, you’re saying you agree with me then? ;)

    It’s fine to state that “the plural of anecdote is not ‘data'” but I’d respond by saying that a synonym for data is often “history.” Very few trends develop overnight. By definition, the “real data” to support them is often not available until you’re most of the way through the steep part of the adoption curve.

    The issue with high-value offshore workers isn’t just the dollar — though it definitely has an effect — but availability of suitable labor. In 1995 there were perhaps a hundred million or two people across former Soviet Bloc countries, India, and China who were for all intents and purposes educated and able to operate at a first-world level of proficiency in their field, they simply lacked the opportunity to do so.

    Just as we’ve spent 20 years drawing down grain inventories and thinking the food supply was limitless, we’ve also spent the past decade imagining that India could not possibly run out of people for us to employ. What we are belatedly realizing is that it takes a couple of generations to create a high-skilled laborer. All countries have an elite, even if it is very small–there are a handful of Bhutanese undergrads at Harvard, I imagine–and that is who we’ve been hiring the past ten years. Well, that’s gone now, and we’re getting closer to the vast peasant class, which is a generation or two behind the curve. The dollar exacerbates the issue but does not explain why wages for programmers in Pune have increased by 25% or so annually for the past 5 years. That is a much more basic supply-demand phenomenon.
    .
    .
    Fabius Maximus replies: Quite right, I do agree with you more or less on all points. The trend is turning. Where we are in the process is, as always, uncertain. Ditto rearding your analysis in paragraph five (“The issue with high-value offshore workers”). I did not mean to imply that offshoring was a single factor phenomenon (only a matter of exchange rates).
    .
    My comment was a methodological critique. Discussions about economics plagued by annecdotes on both sides of every question, people giving their experience as proof. Micro data provides useful experiences, and sometimes interesting insights — but most of the time imo is just chaff tossed into the debate.
    .
    Your comments in the third paragraph (“It’s fine to state that…”) add up imo to saying “we can use data to guess about the present, but will know only in the future.” I agree with this as well.

  16. Update:

    Shortages Threaten Farmers’ Key Tool: Fertilizer“, New York Times (30 April 2008) — Excerpt:

    Some kinds of fertilizer have nearly tripled in price in the last year, keeping farmers from buying all they need. That is one of many factors contributing to a rise in food prices that, according to the United Nations’ World Food Program, threatens to push tens of millions of poor people into malnutrition.

    The squeeze on the supply of fertilizer has been building for roughly five years. Rising demand for food and biofuels prompted farmers everywhere to plant more crops. As demand grew, the fertilizer mines and factories of the world proved unable to keep up. … Manufacturers are scrambling to increase supply. At least 50 plants to make nitrogen fertilizer are under construction, many in the Middle East where natural gas is abundant, and phosphorous and potassium mines are being expanded. But these projects are expensive and time-consuming, and supplies are expected to remain tight for years…. Ms. Nha’s husband, Le Van Son, remembers villagers’ amazement in the 1990s when they learned that a pound of chemical fertilizer contained more of the major nutrients than 100 pounds of manure.

    Overall global consumption of fertilizer increased by an estimated 31 percent from 1996 to 2008, driven by a 56 percent increase in developing countries, according to the International Fertilizer Industry Association. … From 1900 to 2000, worldwide food production jumped by 600 percent. Scientists said that increase was the fundamental reason world population was able to rise to about 6.7 billion today from 1.7 billion in 1900.

  17. Update: “Meat vs Fuel: Grain use in the U.S. and China, 1995-2008“, Jim Lane, Biofuels Digest (April 2008) — Excerpt:

    In 2007, US corn production rose to 13.1 billion bushels, or 349 million tonnes. An estimated 62 million tonnes were used to produce ethanol, based on DOE ethanol production figures and a conversion rate of 2.8 gallons per bushel. 21 million tons of dried distillers grains, based on a 33 percent conversion rate, would have been returned from ethanol producers to the grain markets. This left 308 million tonnes available for US consumption and export.

    … It has been noted by many critics and published in most US newspapers that US ethanol production is causing a rapid escalation in corn prices. Comparing the rise in corn, oil, wheat and rice prices since 2000, using the World Resource Institute and DOE price tables, it can clearly be seen that corn prices, while escalating rapidly, are rising slower than any of the three other food and fuel commodities. In fact, the intensity of price increases is in inverse proportion to the conversion rate into ethanol. Corn, which is used the most among the four commodities as a biofuel, has the lowest price increase. Rice and crude oil, which are not used to make ethanol, have experienced the fastest price increases.

    Conclusions

    1. Rising demand for grain in China, stemming from an increase in meat consumption, is overwhelmingly the cause of supply and demand imbalances in corn production.

    2. Given that the US population has grown 15 percent in the past 13 years, the 82 percent increase in US corn production left plenty for people, plenty for livestock, and plenty for ethanol.

    3. Chinese meat consumption is still 45 percent less than the average consumption in the US. An additional 277 million tonnes of grain would be needed to support China at parity with the US. That would take 68 million acres to grow. …

  18. Building food stockpiles is simple prudence, wisdom going back to Joseph’s time in Egypt.

    Surplus U.S. food supplies dry up“, USA Today (1 May 2008) — Excerpt:

    “As recently as 2003, the USDA had to buy so much powdered milk to support dairy prices that beleaguered officials shipped some to U.S. ranchers for cattle feed. While the previous surpluses were costly and sharply criticized, much of the food found its way to the poor, here and abroad. Today, says USDA Undersecretary Mark Keenum, ‘Our cupboard is bare.’

    “… Because of the current economics of food, and changes in federal farm subsidy programs designed to make farmers rely more on the markets, large U.S. reserves may be gone for a long time. … A coalition of religious and farm groups, in an open letter to Congress this week, warned that low supplies increase the risk of hunger and higher prices, calling for creation of a strategic grain reserve

  19. A look at public policy options for responding to the food crisis: “Rising food prices: Policy options and World Bank response“, World Bank (April 2008).

    Excerpt about biofuel use:

    “From 2004 to 2007, global maize production increased 51 million tons, biofuel use in the U.S. increased 50 million tons and global consumption for all other uses increased 33 million tons, which caused global stocks to decline by 30 million tons (Mitchell 2008). From “A note on rising food prices”, Paul Mitchell, World Bank (2008).

  20. Important update: one of those news stories that means little by itself, but could mean much for the future. This is not a good time for damage to US wheat crops. Note: Leaf Rust and the Stem Rust (like UG99) are different fungi.

    Leaf Rust Poses a Serious Threat in 2008“, Kansas Wheat (29 April 2008) — Wheat leaf rust appears in Kansas. Excerpt:

    The risk of significant yield losses from leaf rust and other foliar diseases has increased dramatically this past week. This alert comes from K-State Extension Wheat Plant Pathologist Erick DeWolf. Leaf rust was discovered in commercial fields and variety demonstration plots in Sumner County on April 24th. The leaf rust was present on the F-1 and F-2 leaves (the two leaves just below the flag leaf), with an incidence of less than 10 percent and severity less than 2 percent, in both Jagger and Jagalene.

    Leaf rust has also been observed on Jagalene and Jagger in commercial fields and varietyevaluations in northern Oklahoma. The disease was slightly more advanced in Oklahoma. Leaf rust was observed at trace levels on Overley near Stillwater, but the disease has not yet been detected on Overley in Kansas. Do not be fooled by this slight delay in the arrival leaf rust races that can overcome the type of resistance in Overley. Overley is very susceptible to certain races of leaf rust, and this variety will likely become diseased soon. Resistance in Fuller, Santa Fe, and Postrock appears to be holding.

    Powdery mildew has also increased significantly during this past week. Jagalene, Overley, Jagger, and Postrock are all susceptible to powdery mildew. The severity of powdery mildew was greater than 25 percent on the F-1 leaves in commercial fields of Jagalene and Overley in Sumner County. These levels of mildew can also result in significant yield losses.

    … The current presence of even low levels of leaf rust and severe powdery mildew suggests that potential for yield loss is significant. Yield losses of greater than 35 percent can be expected if the leaf rust and powdery mildew move onto the flag leaves of susceptible varieties prior to flowering. Varieties that are resistant to leaf rust will not have this much yield loss from leaf rust, but may still be vulnerable to powdery mildew or other diseases.

    The article describes the use of fungicides to limit the damage. For more about wheat rust, see this and this.

    Kansas Wheat is the cooperative agreement between the Kansas Wheat Commission and the Kansas Association of Wheat Growers, joining together as “leaders in the adoption of profitable innovations for wheat.”

  21. Update: more evidence that food prices are rising in part due to inflation. To anyone familar with either history or economics, this screams “inflation.” And just as typical of early stage inflation, neither the people interviewed or the journalist see it.

    Farmers unable to cash in on soaring food prices“, Los Angeles Times (13 May 2008) — Excerpt:

    “All over the world, prices for basic foods — barley for beer, milk for cheese, corn for tortillas, and the rice that serves as a staple for more than half the world’s population — are soaring. But farmers aren’t rushing to cash in on the boom by planting more of the crops.

    “The amount of corn planted in the U.S. is expected to dip this year. Rice acreage in California, which sells as much as half its crop overseas, is predicted to increase by only a small amount. Instead, farmers are planting cheaper-to-grow wheat and soy. They say the reason is simple. The cost of planting some crops is rising as fast as their prices, and sometimes faster, leaving little incentive to increase production of some foods that remain in high demand around the world.

    “… The cost of farming an acre of corn, for example, has risen almost 47% over the last year, according to Wells Fargo & Co. estimates, outpacing the 35% increase in the price of corn in the same period.

    “… Charlie Hoppin, who farms 3,200 acres scattered across Yolo and Sutter counties, is one farmer opting for a crop other than corn. He figures that safflower will be just as profitable, if not better, and a whole lot easier to farm. At today’s prices, corn brings in roughly $1,200 an acre. Safflower will bring in $750. But fertilizer is less than half the cost, the seed is less and I won’t need the same irrigation or pesticides,” Hoppin said.

    “… One problem for all farmers: the rising cost of fertilizer, which has nearly doubled in the last year, according to the Department of Agriculture…. The price of the diesel fuel that is used to run combines and tractors has jumped by half from a year ago, according to the USDA. Seed prices have risen more than 25% from last year, the USDA said.

    “Farmers are also dealing with higher rents, as landowners demand their slice of increased food prices. Indeed, the rent for some of Osterkamp’s land has jumped to $250 an acre this year, up from $175 a year ago.”

  22. Update:

    Riding a Wave“, Finance and Development magazine of the International Monetary Fund (March 2008) – “Soaring commodity prices may have a lasting impact.” Note what they say about prices (bold emphasis added).

    Commodity markets have been booming. Prices of many commodities-especially those of oil, nickel, tin, corn, and wheat-have reached record highs in recent months despite credit market turbulence and slowing activity in many major advanced economies (see Chart 1).

    The current boom has also been broader based and longer lasting than is usual, and it contrasts noticeably with the 1980s and 1990s, when most commodity prices were on a downward trend. That said, despite the apparent reversal of the downward trend, inflation-adjusted prices of many commodities are still well below the levels seen in the 1960s and 1970s.

  23. Update (bold emphasis added):

    Recent Inflationary Trends in World Commodities Markets“, International Monetary Fund (1 May 2008) — Abstract:

    Expansionary monetary policies in key industrial countries and sharply depreciating U.S. dollar exchange rate sent commodities prices soaring at unprecedented rates during 2003-2007. Food prices rose to alarming levels threatening malnutrition and food riots. In contrast, consumer price indices, a leading indicator for monetary policy, were showing almost no inflation and posed a price puzzle insofar their evolution was not responsive to record low interest rates, double digit commodities inflation, and sharp exchange rate depreciation.

    Commodities prices were shown to be driven by one common trend, identified as a monetary shock. Policy makers may have to face a policy dilemma: maintain monetary policy stance with accelerating commodities price inflation, subsequent world recession, and financial disorder; — or tighten monetary policy with subsequent world recession followed by recovery and financial and price stability.

  24. Update: “Challenges and Opportunities in Meeting the New Face of Hunger“, Josette Sheeran, Executive Director of the UN World Food Program, International Food Aid Conference Kansas City (15 April 2008) –Excerpt:

    “This meeting comes at a critical time when food and food prices are in the global spotlight. News reports and images from Haiti of deadly riots and protests are stark reminders that food insecurity threatens not only the hungry, but peace and stability itself. This has led the United Nations Secretary General to declare an emergency, and the World Bank President to call for a “new deal” on global food policy.

    “… I talked to a Member of Congress who is a medical doctor and he said he once learned that there are only seven meals between civilization and anarchy; meaning in the absence of seven meals in a row, things begin to fall apart. I think we are seeing these pressures and the mood changing in many countries as people really get worried about their access and capability to meet their basic food needs.”

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