Global Food Prices—Posner

The increase in food prices in recent years has been dramatic. World food prices roughly doubled between 2004 and 2008, then declined sharply as a consequence of the global economic crisis and now is rising rapidly again and may soon reach or even exceed its 2008 peak.

The price of a commodity will rise if demand increases in the face of an upward-sloping supply curve (unit cost increasing with amount produced) or if, with demand unchanged, the supply curve shifts upward, or if both changes occur. (There are other conditions, such as cartelization, that can drive up prices, but I’ll ignore them.) The supply curve of food is upward sloping, and demand for food has been increasing because of increases in population and in income in poor countries (with higher incomes, people eat more and also eat more costly food, such as meat as compared to bread or potatoes), and also because of demand for biofuels, such as ethanol, that often are manufactured from crops. The increase in demand moves output out along the supply curve, increasing cost and therefore price. In addition, the supply curve itself has been moving upward because of the increased price of oil (a major input into fertilizer and into the operation of farm machinery and transportation of agricultural output to processing plants and markets) and the output-restricting measures taken by Russia and China recently, discussed by Becker. 

The increased food prices are calamitous for very poor countries, and for poor people in other countries (in the absence of subsidy, such as the U.S. food-stamp program), but the world as a whole can take them in stride because they are self-correcting. High prices reduce demand and thus move output down the supply curve, resulting in a new, lower-price equilibrium. 

High food prices might even be considered a good thing from the standpoint of overall global economic efficiency. Farmers are a small minority in wealthy countries such as the United States and France, but the small size of the agricultural sector actually augments its political power, because a compact interest group can enrich its members by obtaining protective legislation that raises the costs of the rest of the population by only a small fraction. The result is widespread restrictions on food imports that reduce agricultural output in countries that produce agricultural products for export. A notable restriction is the U.S. tariff on ethanol produced by Brazil, which manufactures ethanol from waste agricultural byproducts, such as cornstalks, rather than, as the U.S. does, from a valuable crop—corn. 

The “green revolution” greatly expanded agricultural production and caused farm prices to fall. Whether there will be comparable innovations in the years ahead cannot be predicted with any confidence, but they seem unlikely to offset negative factors, which are numerous. Global warming will increase droughts and interfere with irrigation. Glaciers are melting rapidly, which causes flooding (as recently in Pakistan) but decreases the amount of water in rivers or lakes. The reason for that decrease is that while glacier evaporation increases rainfall, rainfall does not significantly increase the amount of water in rivers or lakes, which are major sources for irrigation both natural and artificial, because rain falls randomly; in contrast, normal glacier melting feeds rivers and lakes directly. There is in fact a worldwide water shortage; it can be alleviated by a variety of means, but most of them are costly, such as desalination. 

World population and incomes can be expected to grow for a number of years; so, as agricultural output moves out along a rising supply curve, agricultural prices may continue to rise steeply for many years, with, eventually, calamitous consequences in poor countries. And agriculture is increasingly vulnerable to blight because there is less agricultural diversity; farmers the world over use the same (“best”) seeds for each crop, reducing genetic diversity and so increasing the vulnerability of crops to disease. 

The most promising technological innovations in agriculture involve genetic modification of crop seeds. Limitations on the consumption of genetically modified crops may seem an example of legal measures intended for the protection of domestic agricultural production. Certainly that is a motive and certainly the concern that eating genetically modified crops is dangerous to one’s health is spurious. Nevertheless such crops pose potentially serious environmental dangers. They are engineered to be like weeds—hardier than natural vegetation—and we all know what weeds can do to the vegetation they come into contact with. Genetically modified crops thus may destroy large areas of natural vegetation. Moreover, simply expanding the area of the earth’s surface that is under cultivation is likely to cause deforestation, which is environmentally harmful. Moreover, as less fertile or accessible land is brought under cultivation, the marginal cost of food production rises. 

The combination of rising population and incomes, stimulating demand, and increased costs of agricultural supply, spells continued steep increases in food prices. (Some of the costs are external, however, and hence do not directly affect food prices.) The tendency may be reinforced by the kind of inefficient responses to high food prices that we are witnessing in Russia and China. At some point increases in food prices may induce reform measures that would moderate the increase, such as elimination of tariff barriers. And even before that, rising food prices may induce private adjustments, such as lower birthrates and less meat consumption, that reduce the demand for and the cost of food, and hence food prices. 

Of course the future is uncertain, and food prices famously volatile. Nevertheless the probability of continued increases in food prices cannot be reckoned slight. 

 

Comments

[Jimbino]

Wouldn't the problem go away if our country and others stopped the rampant breeding? Killing off of breeding credits, WIC, and the Department of Education would work wonders here.

[Hyena]

I'm not sure this is an accurate representation of the problem. A look at Wikipedia's entry on arable land (http://en.wikipedia.org/wiki/Arable_land) indicates that as much as three-quarters of all arable land lies in regions with insecure property rights.Insecure property rights will greatly limit investment in more intensive farming practices, from improved irrigation to biotech-driven agribusiness. Supply problems in agriculture may stem more from this fact than tariffs or even developed world policies comprehensively.

[Michael Smith]

There is some drivel in here, and it is dangerous drivel -- for example, ignoring the cartelization of markets for food. A careful review suggests that other factors pushing prices up are less important than cartelization and similar upward pressures on prices that reflect inefficient markets.

But the most serious flaw in this piece is the suggestion that GMOs are a fix for limited diversity of crops. If crops grown from the seeds sold by oligopolists are insufficiently diverse to protect against hardship, why are GMO crops from the same sellers any better? These crops are likely to have less genetic diversity, not more. Pretending to notice some dangers does not adequately recognize the inherent weakness in this approach.

Finally, I really hope that both Posner has better in him than throw away phrases like "the future is uncertain."

[Pradeep Despande]

Price increases seem a lot more dramatic to Western world citizens because their growth in the last decade has lagged far behind the rest of the world. If you are Chinese, in terms of purchasing power, not much has happened in terms of food prices. At an annual growth rate of around 7%, Chinese per capita income has roughly doubled in the past decade. Same as the price increases. Therefore little change has occurred in terms of purchasing power. For Europeans, on the other end, with an anemic 2% annual average growth rate, per capita income only rose 20% in the last decade, so, of course, for Europeans there is a perceived and real erosion of purchasing power when it comes to food and other commodities. The effect is even more dramatic considering the fact that food commodity prices are denominated in declining US dollars.

More than a real increase in food prices, what the West is really witnessing, is the relative erosion of Western World purchasing power compared to the rest of the world, and, more specifically, the developing world. It is all consistent with overall Western World relative decline. Actually it is not that much Western decline as is Emerging World ascent. Unless Westerners re-establish personal incentives to produce that result in at least 4% annual growth (the worldwide average) they will keep fast loosing ground compared to the rest of the world.

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[Jack]

Jimbino? Surely you're aware that Americans are not even reproducing themselves........ ALL of our population growth is from immigration.

Good points! Hyena is right.... the property rights we take for granted in the US are rare in most of the rest of the world.

M. Smith: Indeed! The consolidation under Archer Daniels and the favors purchased from Congress like the wasteful ethanol subsidies, and IBP beef producers is a major factor. And ha! you'll recall the Irish potato famine was due to their being only two strains of potatoes with one being not blight resistant..........and the Brits being happy to take the others.

Pradeep: For a nation already wealthy a 2 - 3% growth rate is not a disaster. I thought you'd get around to pointing out that US wages for most have not had even the 3% "trickle down" which of course makes rising commodity prices the more onerous for most.

BTW I'm (mid term) a bit optimistic on American productivity. Once (if?) we cap off the housing game and (one hopes) WS gleanings for pedaling fraudulent securities replete with obscene levels of "performance bonuses" it just may be that the next crop of "best and brightest" will turn their youthful energies to PRODUCTIVE enterprises for "compensation" packages relevant to, honest, wealth generation.

[Zyntal]

Jack, you're describing the product (Average American Citizen Competence) x (French Governance). Now who's going to outcompete that!

[Jack]

Zyntal: Curiously......... French GDP per hour is equal to that of the US. Considering our natural advantages in resources, farmlands, fisheries et al..... one would think that were we operating on all cylinders they'd not even be at the same table.

But! our wasteful fossil fuel policies are a drag as is our our massive military spending, and! spending double what the French spend on their excellent H/C system while enjoying uncovered medical costs as our number one cause of personal bankruptcy. I'm NOT sure whether French "bankers" carved off as much as our own, but strongly doubt it.

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[The Recapitulator]

This is a nice exposition of supply and demand curves and the structural factors that effect same.

Unfortunately, it ignores the large (and growing) role of speculation into the commodity markets with long only passive investors convinced by clever marketers that commodities are an "asset class".

This will not end well, like the last time and the time before that. Get ready for soul-bending volatility.

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[Jack]

Recap: I've been thinking on similar lines, including the benefit to some OPEC nations of investing oil fattened sovereign funds in oil futures, thus making a fine feed back loop.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

As detailed in an earlier article, a conservative calculation is that at least 60% of today’s $128 per barrel price of crude oil comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures and New York NYMEX futures exchanges and uncontrolled inter-bank or Over-The-Counter trading to avoid scrutiny. US margin rules of the government’s Commodity Futures Trading Commission allow speculators to buy a crude oil futures contract on the Nymex, by having to pay only 6% of the value of the contract. At today's price of $128 per barrel, that means a futures trader only has to put up about $8 for every barrel. He borrows the other $120. This extreme “leverage” of 16 to 1 helps drive prices to wildly unrealistic levels and offset bank losses in sub-prime and other disasters at the expense of the overall population.

The hoax of Peak Oil—namely the argument that the oil production has hit the point where more than half all reserves have been used and the world is on the downslope of oil at cheap price and abundant quantity—has enabled this costly fraud to continue since the invasion of Iraq in 2003 with the help of key banks, oil traders and big oil majors. Washington is trying to shift blame, as always, to Arab OPEC producers. The problem is not a lack of crude oil supply. In fact the world is in over-supply now. Yet the price climbs relentlessly higher. Why? The answer lies in what are clearly deliberate US government policies that permit the unbridled oil price manipulations.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
As I noted in my earlier article, (‘Perhaps 60% of today’s oil price is pure speculation’), ICE was focus of a recent congressional investigation. It was named both in the Senate's Permanent Subcommittee on Investigations' June 27, 2006, Staff Report and in the House Committee on Energy & Commerce's hearing in December 2007 which looked into unregulated trading in energy futures. Both studies concluded that energy prices' climb to $128 and perhaps beyond is driven by billions of dollars' worth of oil and natural gas futures contracts being placed on the ICE.

Through a convenient regulation exception granted by the Bush Administration in January 2006, the ICE Futures trading of US energy futures is not regulated by the Commodities Futures Trading Commission, even though the ICE Futures US oil contracts are traded in ICE affiliates in the USA. And at Enron’s request, the CFTC exempted the Over-the-Counter oil futures trades in 2000.

http://www.globalresearch.ca/index.php?context=va&aid=9042

Hmmmmmmmm, so in regard to food, do we think the spiking and near doubling of corn and wheat prices are due to sudden changes inn supply/demand (as recession sits in) or........ other?

[Jack]

The Stop Excessive Energy Speculation Act of 2008 in the USA (July 15, 2008, by Senators Reid, Durbin, Schumer, Dorgan, and Murray) tries to control speculation in the oil markets.

The Commodities Futures Trading Commission (CFTC) will be in a better position to punish price manipulation that is based on excessive speculation. It will control the "London Loophole" and the use of non-US exchanges to manipulate the price of oil in the USA.

According to the Stop Excessive Energy Speculation Act of 2008, the CFTC will have the authority to control large over-the-counter traders in order to detect price manipulation or excessive speculation.

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