Food for thought

Commodity prices including those for oil and food are surging higher. Aaron Rosenberg looks at the issues of supply and demand

For the past several years the price of food has risen steadily, and 2008 will see food price related crises unfolding across the globe. While recession looms in the West and economies boom in the East, all eyes will inevitably turn to a problem so fundamental that it threatens whole populations.

So why are commodity and especially food prices soaring?

No individual factor is solely responsible; rather it is the perfect storm of several factors that affect the world's supply and demand.

DEMAND

The demand for food is driven by the global population. The number of people on the planet is expected to swell by nearly 25% -- from 6.1 billion in 2000 to 8 billion in 2025. Read Malthus!

All these new mouths will require food, and current production levels cannot meet the increasing demand. As a consequence, the foodstuffs which are relied upon by the most people are surging in price.

Cereals are essential to life in all parts of the world, especially where there is little else to supplement the diets of large populations. For this reason, it is the poorest nations which are being hit the hardest. The U.N. World Food Programme (WFP) warns that rising prices have already plunged 100 million people into poverty, and that number will increase.

The China Syndrome

Another factor pushing up demand is the growing prosperity of China and India. As each develops its middle class, more people are eating more food.

Food which was once a luxury, like meat and dairy, is being consumed in higher quantities. This in turn drives the demand for cereals to feed livestock. Meat consumption in China has risen 150% since 1980.

With China comprising a full 20% of the world's total population, its continuing prosperity means that more food can be imported at higher prices. This in turn spells devastation for poorer countries who can no longer afford to compete for imports.

SUPPLY

The real problem with the increased demand for food worldwide is that supplies are becoming increasingly tight and more expensive. Several factors conspire to limit supply:

The rising cost of oil

With oil prices hitting record-breaking highs of over $135 a barrel, every link in the food supply-chain is paying a greater price. Farmers pay more for the oil used in agriculture and supermarkets pay more for transportation costs and refrigeration. "Food miles" are becoming a significant factor in the cost of imported items.

Land at a premium

Climate change threatens to take a monstrous toll on the supply of arable land used in agriculture. The areas that will feel the impact of global warming first are China and Sub-Saharan Africa--the same two regions where the demand for food will be the greatest.

China's efforts to feed over 1.3 billion citizens have resorted to overgrazing and overfarming, resulting in the loss of one fifth of China's arable land since 1949. Rising global temperatures now threaten what is left--desertification claims close to a million acres of grassland in the country every year.

Additionally, the modernization of the BRIC nations means that much more farmland is being devoted to factories, cities and roads.

The alarming alternative

Ironically, one effort to combat both rising oil costs and climate change has resulted in catastrophic reductions of the global food supply.

The United Nations claims that America now devotes fully one third of its annual maize crop to the production of ethanol, a clean biofuel that can be mixed with gasoline to reduce carbon emissions.

However, America's noble desire to break free from dependence on foreign oil means that it grants generous subsidies to ethanol production. Countries who depend on importing corn from the U.S. are no longer able to pay the higher costs. The IMF confirms that there is "no question" that demand for biofuels is driving up food prices.

TRADING IN FUTURES

These forces of supply and demand are clear not only to governments trying desperately to feed their populations, but also to commodities traders seeking to capitalise on volatile price hikes.

Speculation on the cost of food inevitably drives up the price--as more are willing to trade in food futures, so too do market forces play an increasingly large role in determining the price of food worldwide.

The ethical dilemma faced by today's speculator is simply this: will my actions drive millions into poverty while simultaneously earning my firm billions?

Ultimately the issue is whether or not today's food commodities markets should be treated with the same laissez-faire lack of regulation as other, less essential ones. Will the free market simply fuel the fire?

PROTECTIONISM AND PRICE CONTROLS

Interventionist countries that seek to control the price of food are also exacerbating trade imbalances worldwide. By decreasing domestic prices relative to import prices, food producers are less incentivised to increase their crops.

Like OPEC which controls the price of oil, large-scale exporters are deliberately limiting output in an effort to keep prices high. Thailand, the world's largest rice exporter, recently announced that it has been considering setting up a rice cartel. The nation's rulers reasoned that if Thailand had to pay the increased costs of oil prices as a result of OPEC, it was only reasonable that they should control the price of the commodity which is sold for less than its potential value. The price of regional benchmark Thai grade B rice recently rose above $1000 a tonne, up from $383 in January.

Countries seeking to protect themselves from large trade imbalances have few options-food is a commodity for which there is no substitute and if nations cannot grow it they must buy it.

POLITICAL REPERCUSSIONS

For countries troubled by political unrest, the price of food can be the tipping point. Indeed the French Revolution is best remembered for the famous phrase "let them eat cake"--supposedly the callous response by a government charged with feeding its starving populace.

In the past year, sky-high food prices have sparked riots in Haiti and Egypt, Cameroon and Indonesia.

In response to these concerns the UN has set up a food crisis task force aimed at increasing production. In partnership with the World Bank, the task force will begin by offering $200m in financial support to farmers in the worst affected countries to boost food production and set up a $1.7bn programme to help countries with a food deficit to buy seeds.

However, while humanitarian goodwill persists there will still be certain factions hoping to profit from suffering. This month's tsunami in Myanmar that killed over a hundred thousand people and devastated national rice production had little effect in dampening the ruling junta's desire to export its rice crop to foreign countries. The lucrative returns are simply more enticing than ensuring basic nutrition and survival. Myanmar's officials are even turning back food aid lest it drive down the value of its rice exports.

THE FUTURE OF FOOD

Some economists maintain that the price of food has been kept artificially low for decades due to subsidies and intervention. They view the current prices largely as a correction that, once true values are reached, will stabilise.

However, the general opinion is that these price spikes are too simply too dramatic to be the result of misguided policies--that what we are now seeing is the tip of the iceberg, The commonly held prediction is that prices will increase for decades.

Because the fundamentals of food as a commodity are relatively predictable, speculation in many forms is likely to drive the price of food to its highest level--the level at which prices are simply unsustainable.

While the West remains, for the time being, merely annoyed by higher food prices and hence apathetic, when combined with high fuel prices, the credit crunch, and housing market woes, the future for the Western consumer begins to look grim. The privileged will begin to feel the pinch, but by that time the global food crisis will be, for it is already, in full swing.

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