[Pil-pc-oceania] Global food prices

[Robyn Williamson]

Forwarded from SANET-MG, this article in The Financial Times of  
26/2/08 states at the end that "rich central banks tend to exclude  
food prices from their core inflation measures."

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Food and the Spectre of Malthus
By Mark Thirlwell
The Financial Times
Tuesday 26 February 2008

http://www.ft.com/cms/s/0/eb66fbb0-e489-11dc-a495-0000779fd2ac.html

February has been the month for revisiting old and unpleasant  
economic concepts. Last week, financial markets experienced that  
1970s feeling, as a combination of rising inflation and unemployment  
in the US triggered unwelcome memories of the decade of stagflation  
that ended the postwar golden age and the Keynesian consensus. Then  
came this week's report that the United Nations' world food programme  
might have to ration food aid. Set against a backdrop of rising food  
prices worldwide - global food prices have now risen by more than 75  
per cent since their lows of 2000, jumping more than 20 per cent in  
2007 alone - the news revived fears from a much earlier era,  
conjuring up the Reverend Thomas Malthus.

Soaring food prices have also revived some more contemporary worries.  
When China's annual inflation rate spiked to an 11-year high in  
January on the back of an 18 per cent increase in food prices, China- 
watchers found themselves casting their minds back to the food price  
rises of 1988 and the social disturbances, protests and civil unrest  
that followed. Inflation is often cited as one of the factors behind  
the major demonstrations in 1989.

This rise in prices is a consequence of both demand and supply  
trends. On the demand side, the key factor has been the strong  
consumption growth in emerging markets, which in turn has been  
powered by those countries' impressive income gains. China, for  
example, has accounted for up to 40 per cent of the increase in  
global consumption of soyabeans and meat over the past decade. At the  
same time, a series of supply-side disruptions in key commodity  
markets ranging from drought to disease have been at work.

Perhaps the most important drivers of price gains over the past year  
are developments in world energy markets. High oil prices have  
encouraged a policy focus on biofuels, including lashings of generous  
financial support. Production has responded quickly to these  
incentives: the World Bank reports that the US has used 20 per cent  
of its maize production for biofuels and the European Union 68 per  
cent of its vegetable oil production. This change in usage has  
boosted prices, reduced the supply of these crops available for food  
and encouraged the substitution of other agricultural land from food  
to biofuel production.

This is not the first time in modern economic history that the  
Malthusian spectre of global food shortages has stalked the world  
economy. Surges in food prices in the 1970s and then again in the  
mid-1990s both prompted warnings that agricultural capacity was  
failing to keep pace with a growing world population. Each time, the  
prices jumped it proved to be temporary as supply responded. There  
are good reasons for believing that this latest bout of market  
disequilibrium will ultimately reach the same resolution. That said,  
however, there are two important caveats to set against such an  
optimistic reading of current circumstances.

First, the lag in supply response to the stimulus provided by higher  
prices may prove to be of greater duration than its predecessors, to  
the extent that the current changes in world energy markets - and  
hence the associated demand for biofuels - are likely to be lasting  
ones. With climate change and environmental degradation threatening  
agricultural capacity in several key regions, the elasticity of past  
supply responses may prove to be a poor guide to the future.

Second, during the extended period in which supply continues to lag  
behind demand there are likely to be significant social and economic  
costs. Three in particular stand out.

Most important, a period of protracted higher food prices will be bad  
news for many of the world's poorest people and its poorest  
economies. While the share of food in the consumption basket of a  
rich country such as the US is relatively low, at about 10 per cent,  
it averages about 30 per cent in China and more than 60 per cent in  
sub-Saharan Africa. Those countries that are most vulnerable are the  
low-income net food importers. Higher food prices add more strain to  
import bills that have often already been stretched by higher energy  
prices. Several of the poorest economies fall into this category and  
are heavily dependent on food aid to meet their needs. But the  
worldwide volume of such aid has stagnated for the past two decades  
and, what is worse, the quantity of aid delivered tends to fall as  
prices rise, given that a large proportion comprises a fixed annual  
dollar amount.

Next, there are important social strains to be managed. These may be  
particularly problematic for those emerging markets that are already  
struggling to deal with the consequences of growing inequality.  
Granted, higher food prices are something of a two-edged sword here,  
since higher agricultural earnings could reduce rural-urban income  
disparities. But the big losers are likely to be the urban poor,  
typically a politically volatile group, while many of the rural poor  
will also suffer.

Finally, higher food prices will call for tighter monetary policy.  
Given the disparity in the share of food in consumption baskets, and  
the fact that rich country central banks tend to exclude food prices  
from their core inflation measures, the policy reaction will tend to  
be greater in developing economies. Authorities may also be tempted  
by price controls and other direct measures. However, rich country  
central banks will also have to keep a close watch on any spillover  
effects that tighter monetary policy could have on non-food prices.

________________________________

Joel Gruver
Dept of Agriculture
Western Illinois University
jgruv at hotmail.com

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