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A Closer Look At
Global Food Prices

Jim Prevor’s Perishable Pundit, January 16, 2008

Food prices have become a global issue. The Daily Mail in the UK ran a piece entitled, Soaring prices ‘put £750 a year on average family shopping bill’:

Soaring food prices have put £750 a year on the average family shopping bill, it was claimed today.

In more bad news for struggling householders, the staggering hikes are likely to continue as it was revealed the amounts charged by producers has risen at its fastest rate for 17 years.

The cost of goods leaving food and other factories increased by 5 per cent in December compared with the same month in 2006, official figures showed yesterday.

The increases will inevitably be passed on by suppliers and retailers in the form of higher prices of household staples….

Although the British Retail Consortium objected to that characterization of the market, it was being echoed here in the US as in a piece in the Toledo Blade:

The falling value of the U.S. dollar is contributing to a rise in food prices, particularly with imported foods such as fruit from Spain. A gallon of whole milk that sold for $2.78 in January 2000 costs around $3.95 today.

Eggs were 97 cents at the dawn of the new millennium. Now they’re $2.49 a dozen.

Fresh whole chicken prices jumped from $1.05 to $1.49 a pound in the same time frame.

“A lot of that is attributed to the declining dollar,” said P.J. DiNuzzo, president of DiNuzzo Investment Advisors Inc. in Beaver, Pa. “The weaker currency is having an effect all across the board, all the way to food prices.”

The falling U.S. dollar isn’t the only culprit. The rush for biofuels and record-setting oil prices also appear to be having a ripple effect on food prices.

According to the Consumer Price Index, the price of food on average has gone up 5.4 percent between November 2006 and November 2007, the latest figures available. The cost of dairy and related products has soared 14 percent, while the cost of meat and fish has gone up 4.1 percent, and the cost of bread has risen 8.1 percent.

The Toledo Blade was quick to blame the decline in the dollar but that wouldn’t account for a worldwide phenomenon, and what is a problem in America or Great Britain can easily be a catastrophe in developing countries such as Bangledesh, where The Daily Star ran a piece entitled, Self reliance for food security:

WITH empty shelves in Caracas, food riots in West Bengal, Mexico, Morocco, Mauritania, Senegal and Yemen, warnings of hunger in Jamaica, Nepal, the Philippines and sub-Saharan Africa, soaring prices of basic foods all around the globe have brought into light a looming global food crisis. In the recent past, Argentines boycotted tomatoes when the vegetable became more expensive than meat; and in Italy, shoppers organized a one-day boycott of pasta to protest rising prices; the Russian government, hoping to ease tensions, announced a price freeze for milk, bread and other foods.

In this backdrop, Bangladesh is passing through a desperate time, when the devastating cyclone Sidr in November, on the heel of two successive floods, caused widespread damage to standing rice crops and winter vegetables and wreaked havoc on the government’s demand and supply mechanism.

Nearly every region of the world has recently experienced drastic food price inflation. Retail prices are up 18% in China, 17% in Sri Lanka and 10% or more throughout Latin America and Russia. Zimbabwe tops the chart with a more than 25% increase. Double-digit price hikes for almost every basic foodstuff have driven that inflation over the past year.

Dairy products are as much as 200% more expensive since last year in some countries. Maize prices hit a 10-year high in February 2007, while wheat is up 50%, rice up 16% and poultry nearly 10%.

The price of any commodity rises only when its supply dwindles or becomes uncertain, and that is exactly what happened with rice, wheat and a number food and milk products. Prices on the global commodity markets have been in turmoil as a series of poor harvests — especially in Australia — which have led to lower supplies of wheat.

This has been combined with surging demand from India and China. The combination of falling supply and rising demand has led to soaring grain prices, which, in turn, increased the cost of meat and dairy products as farmers seek to recoup the money they have had to pay for feed that is more expensive.

On the demand side, one of the key issues is bio-fuels. Since virtually all the crops we currently grow for food can also be converted into fuel, either in ethanol distilleries or in bio-diesel refineries, high oil prices will open a vast new market for farm products. Those buying commodities for fuel producers are competing directly with food processors for supplies of wheat, corn, soybean, sugarcane, and other key crops.

Thus, the price of oil is setting the price of food simply because, if the fuel value of a commodity exceeds its value as food, it will be converted into fuel.

The scale of the change is mind boggling. The Indian government says it wants to plant 140,000 sq km acres of bio-fuel crops, and Brazil as much as 1.2m sq km acres. South Africa is being touted as the future Middle East of bio-fuels, with as much as 4m sq km acres of land ready to be converted to crops for fuel.

Indonesia has said it intends to overtake Malaysia and increase its palm oil production, from 64,000 sq km acres now to 260,000 sq km acres in 2025, for energy.

A year or two ago, almost all the land where maize is now being grown to make ethanol in the US was being farmed for human or animal food. As of today, since America exports most of the world’s maize, its conversion to fuel is rsulting in food scarcity with price hike. The competition for grain between the world’s 800 million motorists, who want to maintain their mobility, and its two billion poorest people, who are simply trying to survive, is emerging as an epic issue.

Demand for grain is increasing with the world population, and more is diverted to feed cattle as the population of upwardly mobile meat-eaters grows. The boom in emerging markets such as China and India has meant increasing wealth. As a result, in China the population is now consuming expensive food such as beef in greater quantities than ever before — consumption of dairy products there has doubled over the past five years.

According to an Australian report on food demand in 12 Asian countries — representing more than half the world’s population — upto 2020, beef consumption will increase by 50%, pork 30%, chicken meat 40% and dairy 55%.

It requires about two kilograms of feed to produce one kilogram of chicken, and the ratio is 4:1 for pork and 7:1 for beef. It is estimated that the additional demand for feed grain by 2020 will be 350 to 450 million tones — a 20 to 30% increase on present global production.

At the same time, on the supply side, reserves of cereals are severely depleted. World wheat stores declined 11 percent in 2007, to the lowest level since 1980. That corresponds to 12 weeks of the world’s total consumption — much less than the average of 18 weeks consumption in storage during the period 2000-2005.

In seven of the past eight years the world has actually grown less grain than it consumed. To crown it all, global warming has decreased crop yields in some crucial places.

The knock-on is being felt across the world. In rich nations, soaring food price means a few more pence for breakfast cereal in the short term, and a slightly higher cost for toys, clothes and other China-made goods. However, for the world’s poorest communities, the rises have a potentially devastating effect. In the present food crisis, Bangladesh had to ask for half a million tones of food aid — a severe blow to our pride that we had been trying to wean-off international assistance.

The price of cooking oil — of which it imports 1.2m tones a year — has almost tripled in the past two years because it is now valued as an alternative to diesel oil. More worryingly, our main staple of rice is hard to buy at any price because India, Vietnam and Ukraine have recently cut exports.

Among the losers from higher food prices are big importers. Japan, Mexico and Saudi Arabia will have to spend more to buy their food, which they can easily afford. More worryingly, some of the poorest places in Asia (Bangladesh and Nepal), Africa (Benin and Niger) and other developing countries as a whole will spend over $50 billion to import cereals this year, 10% more than last year, which will have lasting impacts on their future development.

As Gary Becker, a Nobel laureate in economics, points out, if food prices rise by one-third, they will reduce living standards in rich countries by about 3%, but by over 20% in very poor ones.

In our context, back to back floods and a cyclone have heavily damaged our crops, and the ensuing food scarcity and mad rush out of panic to hoard grains at household level have further deepened the imbalance between demand and supply.

Presently, we have reasonable inflow of grains especially rice, but the reserved stock, because it was bought at higher prices with a hope of selling in the future for better return, is failing to bring down the price.

It is not a short-term menace, and is forecasted to continue and spread in 2008, remaining a key global issue. Until that time, to ensure our survival, all of our steps need to be highly calculative, with our vision extended to the future. Against this backdrop, aid in the form of cash will worsen the situation. Increased flow of cash will increase purchasing power without effective rise in supply. The demand for food will rise, and further increase the price due to shortfall in supply.

On short-term basis, aid in the form of food grain will raise supply, alleviate scarcity, lower prices, and enhance accessibility. However, the main emphasis should be on the production side, on input factors for food production with improved technologies and knowledge, and appropriate incentive to producers.

Again, food aid should not be prolonged, because it will act as a disincentive to the poor farmers. There will come a time when aid will be unable to feed us, unless we learn to feed ourselves.

Why food prices change is a frequently asked questioned, and the answer is always the same — because of supply and demand. Why supply and demand fluctuate is so complicated that it is difficult to ascertain the truth until long after the situation is said and done.

For the moment, the forces that have been noted as putting pressure on global food prices are two-fold: On the supply side, there is the drive to produce plant-based energy, especially ethanol, which is utilizing land and other resources, such as skilled farmers, tractors, etc., that otherwise could be devoted to food production. On the demand side, you have greater prosperity in developing countries, especially China and India, leading to higher per capita calorie consumption and richer, more western-style diets.

One has to be careful about leaping to conclusions on these things. A lot of times the “problem” is defined by our assessment of what is irregular or different. So, perhaps, suburban sprawl and the political pressure it brings to restrict pesticides and other agricultural by-products or a hesitancy to use high-yielding GMOs might actually account for more of a problem than the mentioned “causes” but are seen as “normal” and so not considered.

Of course, whatever the cause, what this article doesn’t recognize is that those price pressures are the only thing that is likely to make the self reliance called for in the title even a possibility.

There is now quite a bit of evidence that — whatever the motivation of the givers — international aid in the form of food has long term negative consequences for developing countries.

The problem is that free imported food makes it difficult or impossible for domestic growers in these countries to compete — and so free food aid depresses domestic production.

The author’s proposal:

On short-term basis, aid in the form of food grain will raise supply, alleviate scarcity, lower prices, and enhance accessibility. However, the main emphasis should be on the production side, on input factors for food production with improved technologies and knowledge, and appropriate incentive to producers.

This basically is saying we need free food now because otherwise people will go hungry, but we should invest in production so in the future we won’t need it. That seems reasonable but actually is a recipe for disaster.

Remember that today is yesterday’s future, and accepting free food to drive down prices means that those who invested in the past will not be able to earn adequate returns today. It also establishes a precedent, and investors will not believe that in five years others won’t still be calling for accepting “temporary” free food.

Obviously if people are starving, we have to deliver the food but the crucial policy discipline is to make sure producers can sell their crops at highly profitable levels. It is this discipline that will automatically lead to increased production.

Western governments and institutions that want to help poor countries need to focus on making sure farming is a profitable endeavor.

That is the right policy long term, but short term there can be plenty of suffering.

The Bangladesh article contains a quote from University of Chicago Professor Gary Becker that is a haunting reminder of the way things play out in the world:

As Gary Becker, a Nobel laureate in economics, points out, if food prices rise by one-third, they will reduce living standards in rich countries by about 3%, but by over 20% in very poor ones.

When the Titanic sank, there were many acts of Edwardian chivalry and so 9 men died for every woman. In fact a far higher percentage of men traveling first class died than women traveling third class; still 60% of those traveling first class on that ill-fated voyage survived, while only 25% of those traveling steerage did.

A reminder that life is perilous near the waterline — as food prices rise, this is something we need to be cognizant of.

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