Worldwide agricultural whodunit -
The last year, and particularly the last few months, have seen a dramatic rise in the prices of food prices. The World Food and Agriculture Organization’s (FAO) Food Price index rose less than 10% in 2005, over 10% in 2006, almost 40% in 2007, and over 10% already in the first few months of 2008. Worldwide, food prices are almost double what they were just over two years ago. The rise in food prices has triggered a significant humanitarian crisis; some experts state that tens of millions of people will no longer be able to afford what is considered adequate nutrition.
In a wealthy country like Israel the higher food prices are mainly an inconvenience, not a hardship. Even the poorest households in Israel spend less than a quarter of their budget on food, and most of this is not on staples. (That doesn’t mean these families don’t experience hardship, it just means that our hardships are different than those in third-world countries.) But in many countries, including neighboring Egypt, higher food prices have led to significant unrest. Many poor countries have seen food riots in urban centers.
This curse for urban dwellers could at least have been a blessing for rural farmers now able to get much more money for their crops. Unfortunately, many developing countries have clamped down on exports in order to guarantee sufficient local supplies, thus ensuring general misery.
Who is to blame for this crisis? Usually we associate famine with some kind of natural disaster, but in fact there have been no catastrophic supply shocks. Dry weather in the southern hemisphere has affected yields but by no means is there any kind of famine. Following are the main suspects in this blight, together with the suggested cure for the world’s hungry:
SPECULATOR THEORY: Since time immemorial, speculators have been blamed for shortages. Classical economists view speculators as heroes, stockpiling commodities in times of shortage to ensure that supplies do not run out, demagogues view them as villains, running up profits at the expense of the starving masses. In this case, the speculator theory has a sophisticated scientific twist: according to Harvard macroeconomist Jeffrey Frankel, current investment in commodities is driven not by expected supply shortages (the common denominator of the hero and villain theories) but rather by low interest rates resulting from the desire of central banks to inflate in the wake of the sub-prime crisis (itself the result of greedy and imprudent speculators). Commodity stockpiles don’t pay interest, so high interest rates are a deterrent to demand. Cure: more regulation.
CHOP SUEY THEORY: The Chinese are to blame. As they get richer, they want a richer diet with more meat. Since meat requires many times the amount of grain per calorie as eating the grain straight, world demand goes up and with it the price. The only cure is vegetarianism. A variation is that Chinese (and Indian) development are jacking up world oil demand, increasing the price of agricultural inputs including fuel for tractors and fertilizers, which are often made from petrochemicals.
INCONVENIENT TRUTH THEORY: Israeli analyst Vered Dar explained this week that Al Gore is to blame for world food shortages. Al won a Nobel Peace Prize for convincing us (i) that the earth’s climate is warming up, (ii) that the reason is greenhouse gases, especially CO2 (iii) that the rise is due to fossil fuels, and (iv) that a good cure is biofuels made from crops, which when burned release only the same carbon dioxide they took up when they grew. As a result, huge swathes of cropland were diverted to corn for ethanol, oil palms for palm oil, etc. This reduced food supply directly (corn used for ethanol instead of food) or indirectly (acreage and other inputs used to grow biofuel stocks instead of food crops). The inconvenient truth here is that CO2 production was not meaningfully reduced (ethanol production requires energy inputs, and oil palms are being grown where previously rainforests soaked up huge amounts of CO2) but mass starvation was increased. Cure: go back to environmentally-friendly fossil fuels.
I admire Jeff Frankel on this side idolatry as much as any, and especially since the subprime crisis I don’t mind occasionally casting traders with black hats, or perhaps coxcombs. But I have trouble with the theory that speculators are stockpiling commodities, whether for heroic, villainous or financial reasons, for the simple reasons that commodity stockpiles are declining. (Paul Krugman pointed this out.)
I think the main reason is the price oil, an input into agricultural, and that there is no cure. Chinese demand for oil is much more important than their demand for meat (by the way, meat prices have gone up much less than grain prices), this raises the price of agricultural inputs and so food prices go up. So the food price rises are supply-based, not demand based, though they have their roots in demand for oil. It was indeed foolhardy to devote so much cropland to subsidized biofuels in the past, but oil is so expensive now that it may not be foolhardy to devote the land to unsubsidized biofuels in the future, so we will get limited relief from getting rid of biofuel subsidies. As former Bank of Israel governor David Klein wrote this week, we will just have to get used to higher food prices.
The humanitarian trick is to keep this from being a curse to developing countries. Many people assume that poor countries specialize in agricultural production, and export crops to rich countries which specialize in industry and high-tech. This is logical but unfortunately not true. Developing countries are generally crop importers, and this is due in large measure to bad policy. Wealthy countries adopt beggar-thy-neighbor agricultural subsidies which drive developing countries out of the market; the developing countries themselves, perhaps in a race to industrialize, err in the opposite direction and subsidize industry while crippling agriculture. A more rational worldwide agricultural regime could help turn the increase in food prices to the partial advantage of the poor countries who are now its main victims.