Commenter Benno points to news items that food prices are at new highs. Sure enough, a check at the web site of the UN Food and Agriculture Organization reveals that, whatever the prospects of another oil price shock, another food price shock is well under way. The data is above, and you can see that the December 2010 reading is just above the peak in 2008.
A couple of caveats are worth noting. First, as far as I can tell - the documentation at the FAO website is unclear - this index is not inflation adjusted. That would have essentially no effect on the difference between the two peaks, since there's basically been no net inflation between mid 2008 and late 2010. But it would make the peaks look less dramatic relative to the earlier history of the series.
More importantly, this is an index of food price commodities - the price of bulk hogs, wheat, chickens, butter, etc. The index is formed by export weighting the price of all these different commodities. However, few people eat a diet consisting mainly of internationally traded food commodities. In developed countries, people eat mainly processed foods in which the cost of the raw materials are only a small part of the overall cost of the food on the supermarket shelf. In rural parts of poor countries, a lot of the diet is coming from subsistence farming that is not economically well connected to international food markets.
To illustrate the first of these issues, look at the US Consumer Price Index for food and beverages:
Probably the people most exposed to food commodity prices are poor consumers in developing country cities, as well as recipients of food aid. I would expect social unrest to show up there first.
While it's true that the cost of the US consumer diet is mostly in processing, packaging, distribution and marketing, the majority of the cost of poultry, hog, steer and dairy diets are the base commodities themselves.
ReplyDeleteThe long term effect of these swings in commodity prices on the ag sector is the continued elimination of the small diversified farmer in favor of increasingly large scale monocultures - both genetic and geographic.
We grouse about banks too big to fail but we continue betting all of our food production on fewer and fewer producers and genetic strains.
Banana anyone?
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Apparently the price of rice is only half of what it was in 2008.
ReplyDeleteSo the Chinese have breathing space here. My guess is that biofuels squeeze the price of wheat more than the price of rice.
Andrew Xie, former chief economist of Morgan Stanley Asia Pacific, is among those who sees the world economy as a zero-sum between the US and China.
The most likely candidates to trigger the next global crisis are the U.S.'s sovereign debt or China's inflation. When one goes down first, the other can prolong its economic cycle. China may have won the last race. To win the next one, China must tackle its inflation problem, which is ultimately a political and structural issue, in 2011. If China does, the U.S. will again be the cause for the next global crisis. China will suffer from declining exports but benefit from lower oil prices.
here.
Stuart,
ReplyDeleteFood prices and fuel- a couple of comments from Europe.
From 1, 2011 all EU countries will start selling E10, thus petrol with 10 % by volume ethanol. Germany and Finland are already well ahead. As it looks from Wikipedia, the world will use more and more ethanol, which will probably influence food prices.
http://en.wikipedia.org/wiki/E10_fuel
One interesting innovation from the Finnish petrol company St1, who just bought Shell Sweden, related to you wish for a carbon neutral transport, is their sustainable bio ethanol produced locally from waste. They claim the life cycle emissions from their bio ethanol is 0.01 kgCO2/kgoe, compared to US corn ethanol 1.4 CO2/kgoe.
http://www.st1.eu/index.php?id=2883
Hi Stuart,
ReplyDeletehere is The Economist:
Malthusian mouthfuls
seems like food prices are actually declining ;-)
Alexander - it's quite true that there were big food price shocks in the seventies, and then food prices fell for decades. That's one big driver for why farms keep getting bigger and bigger - farmers have barely been making money, and the little ones go under or sell out to big ones with better economies of scale.
ReplyDeleteStuart,
ReplyDeleteKjell Aleklett in his blog Aleklett´s Energy Mix says that
“Detailed studies in the USA show that 1 calorie of prepared food on the table requires, commercially, the equivalent of 7.4 calories to put it there. A global average is 5 calories per calorie of food on the table. Most of this is energy is from fossil fuels. If we take our food requirement of 12 million barrels of oil per day and multiply it by a factor of 5 we get 60 million barrels of oil equivalents per day which is 30% of all fossil fuel use. Those that call for zero carbon dioxide emissions by 2050 must first explain how an estimated 9 billion people will be fed.”
http://aleklett.wordpress.com/2010/05/19/agriculture-as-provider-of-both-food-and-fuel-2/
If he is right it should be fairly simple to estimate the influence of energy prices on food prices. If we eat 2500 kcal per day it takes 12500 kcal of fossil fuel to produce it, which corresponds to 2.5 gallons of oil or gasoline.
Stuart - does that mean that increasing food prices will make small-scale farmers more competitive (or less uncompetitive)?
ReplyDeleteWhat will the "backward" process look like?
Alexander:
ReplyDeleteI speculate that higher food prices will have slightly complex effects on the size distribution. Obviously, it will raise farm profits for farmers of all sizes, and that will mean that it's easier for existing small farmers to hold on, instead of having to sell out after a couple of bad years. On the other hand, it will also raise the price of land, and that will mean that it's harder for someone without much capital to buy an existing small farm (or buy a large farm and split it up).
It will still be true that there are significant economies of scale in industrial farming, such that large farms are more profitable than small farms.