Food

by John Quiggin on April 17, 2008

The big increase in food prices over the last six months or so raises lots of issues, of which I’ll try to cover a few.

The first arises from the fact that prices for commodities, including oil as well as most ag commodities, are typically quoted in $US. In a situation where, for obvious reasons, the value of the $US is declining against all major currencies, this can be quite misleading. Measured against the euro, the currency of the world’s largest unified economy, the increase looks a lot less steep. The declining usefulness of the $US as a unit of account is another step in the process of transition away from a world in which the $US is a reserve currency. More on what will replace it soon, I hope.
In substantive terms, the increase in $US commodity prices is a big problem for the many Asian economies that have pursued some kind of peg to the $US as a means of maintaining export competitiveness. The adverse impact on domestic consumers is now becoming obvious, and the only solution is to abandon the dollar peg and allow an appreciation. China is already moving in this direction.

A second important point is the impact of demand from the biofuel sector, particularly for corn in the US. The idea of making biofuels from food crops was always problematic and the subsidy regime in the US makes it more so. The current food crisis should make subsidies for food-based biofuels politically and economically untenable, pushing the industry away from this easy short term solution and in the direction of sources such as switch grass, grown on marginal or non-arable land.

Finally, the biggest increases have been in wheat prices, reflecting the drought in Australia and in some other wheat producing countries (I think Kazakhstan?). It seems likely, though it’s still impossible to prove, that human-induced climate change is increasing the frequency and severity of drought. So, it’s important not to regard climate change as a problem for the future. In all probability, adverse effects are already here.

{ 57 comments }

1

alkali 04.17.08 at 9:50 pm

A second important point is the impact of demand from the biofuel sector, particularly for corn in the US. The idea of making biofuels from food crops was always problematic and the subsidy regime in the US makes it more so.

Has there actually been a substantial increase in use of food crops as biofuels in the last six months, or has there just been more discussion of the potential for use of foodcrops as biofuels?

2

richard 04.17.08 at 9:58 pm

John – since you’re not in the US, you presumably didn’t have to have food shortages brought to your attention by Fafblog:
http://fafblog.blogspot.com/2008/04/giblets-world-news-update.html

Do you know if we’re facing a genuine supply shortfall or a distribution problem? In Fafblog’s immortal words, How Fucked Are We?

3

Beryl 04.17.08 at 10:03 pm

For years, the problem with cropland was that there was too much of it, which kept food prices low to the benefit of consumers and the detriment of farmers. Now, because of a growing global middle class as well as federal mandates to turn large amounts of corn into ethanol-based fuel, food prices are beginning to jump.

http://www.nytimes.com/2008/04/09/business/09conserve.html

4

Slocum 04.17.08 at 10:20 pm

The current food crisis should make subsidies for food-based biofuels politically and economically untenable

I hope you’re right, but there’s very little in the current U.S. election campaign to support that. The Iowa caucuses were only three months ago (yes, it seems much longer) and all the candidates expressed support for the corn ethanol program. Obama (a senator from a state that’s in the heart of corn and corn-ethanol country) is particularly bad on the issue:

http://obama.senate.gov/news/050316-senator_obama_praises_ethanol_/

But even McCain (who’d previously denounced corn-ethanol) flip-flopped in Iowa. Though while praising ethanol he still claims to oppose subsidies, so I guess that’s something.

But really, it’s just another farm subsidy — and what’s the record of doing away with harmful U.S. and European farm subsidies?

5

Beryl 04.17.08 at 10:26 pm

And, re the collapse of rice production in Australia…

http://www.nytimes.com/2008/04/17/business/worldbusiness/17warm.html?em&ex=1208577600&en=6ba8c79059e909b1&ei=5087

But…

Moderate warming could benefit crop and pasture yields in countries far from the Equator, like Canada and Russia. In fact, the net effect of moderate warming is likely to be higher total global food production in the next several decades. But the scientists said the effect would be uneven, and enormous quantities of food would need to be shipped from areas farther from the Equator to feed the populations of often less-affluent countries closer to the Equator.

6

Matt 04.17.08 at 10:56 pm

John- do you really think the $US will stop being _a_ reserve currency? Obviously it’s already stopped being _the_ reserve currency, but doesn’t it seem likely that there will be a rebound of some degree at least in the $US and a new equalibrium w/ multiple reserves (perhaps with the Euro as dominant, but not by much, I’d think, over all)? I don’t know much in this area but other options would be surprising to me. I’d love to hear more what you think and why.

7

Quo Vadis 04.17.08 at 11:30 pm

For years, the problem with cropland was that there was too much of it, which kept food prices low to the benefit of consumers and the detriment of farmers. Now, because of a growing global middle class as well as federal mandates to turn large amounts of corn into ethanol-based fuel, food prices are beginning to jump.

I had heard that farm subsidies were keeping global market prices so low that developing countries could not compete for exports, thus denying them one otherwise accessible way to develop their economies and work their way off foreign aid. As recently as a couple of years ago, I heard a representative of one African country make this very point. This suggested to me that there was an excess in global production capacity and I had hoped that there might one silver lining to the consequences of the diversion of agricultural output to address energy needs.

8

sara 04.17.08 at 11:49 pm

Given the collective inanity, schadenfreude and right-wing tendencies of the US media, it’s only a matter of time before pundits, noting the increasing incidence of famine and food insecurity, claim “At least we halted the obesity epidemic.”

They forget that hungry people are a little unstable.

9

John Quiggin 04.18.08 at 12:08 am

Matt, I’m planning a post on this soon. A multipolar world is one possibility, a shift to euro dominance is another. But I think there’s an important sense in which the US is currently the reserve currency, but will soon cease to be so.

10

Brad Holden 04.18.08 at 2:08 am

Comment #1 asked if there has been a big change in the amount of corn going into ethanol production.

There is a discussion of this over at Econbrowser. The short answer is that the USDA projects that 25% of 4Q07 production and 31% of 1Q08 production will be used for ethanol. They predict that the rapid upturn will saturate soon. The post gives references.

The source has a lot of interesting plots (did you know wheat consumption has exceeded production?).

11

bigTom 04.18.08 at 2:57 am

The current shortages seem to have three major causes. The first is the expansion of the middle class in the developing world. As these people upgrade their diets to include more meat, and probably higher calories as well, global ag commodities demand increases. Secondly we have the whole biofuels thing, corn in the US, but other crops are being diverted elsewhere. The pleas of developing country politicians to cut out the biofuels are falling on deaf US media ears. These folks consider that good relations with ADM are more important than letting the public in on the dirty secrets of the biofuels craze. Thirdly we have had climate, how much of this is climate change, and how much simple bad luck is hard to tell, although climate scientists expect the weather to become more variable (which is bad for production). Corn had been displacing other US crops, but this year less corn has been planted than last. After only a few years of corn, other crops must be rotated in to rebuild the soil.

Until Americans start seeing starving people of their big screen TVs, and actually see someone saying biofuels are part of the problem, I don’t see things changing.

12

christian h. 04.18.08 at 2:59 am

There’s also the problem that many countries in the third world have long been dependent on food aid because their subsistence agriculture has been destroyed by the impact of global capitalism ,and farming replaced by export crops under pressure of IMF, World Bank etc.. Now food aid is becoming too expensive (WFP budgets, at least, are likely in dollars), and food imports by those countries themselves are becoming prohibitively expensive.

In addition, various countries (or parts thereof) had to block grain exports. The miracle of capitalism. It works really well, for rich people.

13

almostinfamous 04.18.08 at 3:52 am

another perspective on the food crisis

14

Tangurena 04.18.08 at 4:15 am

Producers plan to plant 86 million acres of corn this year. While 7.6 million acres less than 2007, this would still be the second-largest area since 1949.

Nationwide, soybean acreage is expected to jump 18 percent, to 74.8 million acres. This is an increase of 11.2 million acres from 2007 and is just 1 percent below 2006’s record high.

http://www.nass.usda.gov/Newsroom/2008/03_31_2008.asp

For 7 of the last 8 years, the world has consumed more wheat than was produced. The drought in Australia has cut down on production. Ukraine, another large producer isn’t producing as much as they used to. A virulent rust (a type of fungus) called UG99 is reducing wheat crop yields in Iraq, Iran, Pakistan and Afghanistan. Between IQ/IR and the ‘stans, this affects the region of the world where about 25% of the world’s wheat crop is grown. The infection is expected to reduce wheat yields by 80% over the next 2 years as there aren’t any commercial wheat strains (that I know of) resistant to UG99; further, not that many people in the region trust the US enough to purchase expensive hybrid seed. Most farmers in the region save some of the crop to use as seed the next year, and that can’t happen with hybrid seed. UG99 was first discovered in Africa and has been spreading. The spores would be indistinguishable from dirt and we have a lot of traffic going between the US and Iraq/Afghanistan. All it takes is one dirty boot to bring back enough of this rust to cripple US & Canadian wheat production.

http://en.wikipedia.org/wiki/Stem_rust

Many years ago, I acquired a copy of Altered Harvests, and one of the things that book made clear was our overwhelming dependence on a few main food sources, and how a few diseases caused major lifestyle changes around the world. The British coffee plantations were descendants of a single handful of seed. When disease wiped out the coffee plantations (but not the tea plantations), the public switched to tea. The potatoes in Ireland were all genetically similar to each other – a disease that affected one, affected all. In 1970, a corn blight wiped out about 20% of the US corn crop due to a dependence on one particular strain of corn that the seed growers were infatuated with. Any disease that could affect Texas Male Sterile Cytoplasm could affect 80% of the US corn crop at that time. And that was how the blight touched off marches and protests in DC by housewives and farmers that lead to our overdependence on price and crop supports for corn.

Omnivore’s Dilemma points out that the majority of food items in US markets are based on corn at some stage of the transition from raw materials to the grocery store.

The Basmati rice I purchase from the local middle eastern market has more than doubled in the last year. Of the three varieties of bread that I get at the local grocery store, 2 have been dropped and can now only be obtained at healthfood stores (for those who care, “Ezekial 4:9” and “Men’s Health”), and the other one has gone up 50% in the last year (Orowheat).

15

lemuel pitkin 04.18.08 at 4:32 am

I think there’s an important sense in which the US is currently the reserve currency, but will soon cease to be so.

If this isn’t the most interesting question in international economics today, it’s certainly in the top two or three.

For what it’s worth (flat nothing) I’m not as confident as John Q. that the dollar will be losing its reserve status anytime soon.

First, the country supplying the reserve currency needs to run a trade deficit. Too big a deficit is a problem, but too small a deficit is a much bigger one (the problem the Marshall Plan was needed to solve was the postwar US trade surplus, not — as people tend to think — wartime destruction as such). Not clear that the trade position of Europe — let alone Japan — is such as to allow them to supply their currency in sufficient quantity to function as a reserve.

The important point is that if you think of the dollar as the equivalent of gold under the gold standard, the US can run substantial (not unrestricted, but a couple percent of GDP) external deficits forever, without creating problems.

Second, the decisions makers here aren’t just central banks or even firms, but elites — individuals and households — whose decision about what form to hold their wealth in, is influenced to a non-trivial extent to how they expect to respond to a political and/or economic crisis in their home country. Is Europe anywhere close to as attractive a destination for (capital) flight as the US? I dunno; maybe it’s getting to be.

Third, there’s a coordination problem here. A reserve is good only insofar as it’s universally accepted. Admittedly the situation in this respect is quite different than 10-15 years ago, with the euro as the clear pretender, but if the transition doesn’t happen soon? The relevant variables would seem to be who holds your external debt and who you buy your capital goods from; I don’t know if there are significant enough regional variations to create ambiguity about the new reserve currency but that’s the question anyway.

Multiple reserves are hard to imagine in the context of today’s unrestricted trade and capital flows, but maybe I’m missing something.

Looking forward to your analysis John.

16

Sortition 04.18.08 at 4:50 am

The current food crisis should make subsidies for food-based biofuels politically and economically untenable, pushing the industry away from this easy short term solution and in the direction of sources such as switch grass, grown on marginal or non-arable land.

You find it easy, now, to dismiss grain based bio-fuel as a “short term solution” and to rely instead on the promise of cellulosic bio-fuel. And yet, according the Stern review, which you consider credible expert assessment, half of the bio-fuel production in 2050 would be grown on dedicated cropland, requiring “10% of all arable land worldwide,” (box 9.5).

17

Luis Enrique 04.18.08 at 6:58 am

I’m not sure to what extent I buy the story that food production in poor countries has been destroyed by global capitalism and the IMF etc* but to the extent that the shortfall in supply has been caused by changes in land use (towards cash crop etc.) then isn’t there something of a silver lining there, in so far as land can be switched back to food production in response to high prices?

* more in terms of questioning its magnitude, as opposed to denying that ‘reforms’ in some countries harmed food output. There is and World Bank IEG report that has some data: big pdf here

18

John Quiggin 04.18.08 at 7:07 am

Sortition, there’s a big difference between regarding an economic analysis as credible and agreeing with every point in it. As a general point, if you want to engage in constructive discussion, you should learn to avoid the snarky “gotcha” tone that pervades many of your comments.

19

abb1 04.18.08 at 7:10 am

To add to lemuel’s #14, FWIW, according to wikipedia in 2007 the dollar constituted 63% of of official foreign exchange reserves – to euro’s 26%.

Econometrical analysis suggests, the euro may replace the U.S. dollar as the major reserve currency by 2020 if: (1) the remaining EU members, including the UK, adopt the Euro by 2020 or (2) the recent depreciation trend of the dollar persists into the future.[4]

Those are some big ifs.

20

bad Jim 04.18.08 at 8:18 am

I watch the value of the dollar daily. The euro keeps going up, but the pound, the Swiss franc, the loonie seem to be tracking the dollar, so, apart from the euro, exchange rates don’t explain much.

21

ajay 04.18.08 at 9:18 am

Another point: high oil prices will feed through into high food prices, because oil’s an essential ingredient, both for fuelling farm equipment and food transport and for manufacturing fertilisers.

22

Stuart 04.18.08 at 10:57 am

The adverse impact on domestic consumers is now becoming obvious, and the only solution is to abandon the dollar peg and allow an appreciation. China is already moving in this direction.

Haven’t they been moving in this direction since July 21, 2005? In fact Bloomberg today released an article to suggest they are actually planning (according the Deutsche Bank and Citigroup) to slow down the unpegging process to support its exporters.

23

Tom 04.18.08 at 12:23 pm

To what extent is speculation from commodities traders pushing up the prices? Or am I barking up the wrong tree?

24

SamChevre 04.18.08 at 2:31 pm

Seconding ajay at #21; biofuels are part of the issue, but fuel costs generally is probably a bigger issue. Fertilizer has more than doubled in price in the last 5 years and is about 50% more this year than last, diesel fuel has tripled in price, natural gas has doubled–those are the biggest variable purchased inputs to grain production.

25

abb1 04.18.08 at 4:18 pm

Bad Jim, a few weeks ago the dollar fell below swiss franc for the first time ever. 5-6 years ago it was about 1.5chf for a dollar. The pound is kinda low now (housing bubble is due to pop, apparently), but still: it’s about $2 for a pound, also quite remarkable.

26

Nordic Mousse 04.18.08 at 4:26 pm

# 19 “Those are some big ifs”

What’s so iffy about it?

27

Nordic Mousse 04.18.08 at 4:27 pm

Sorry, that was supposed to be referencing #19

28

christian h. 04.18.08 at 4:29 pm

luis enrique (17.), I don’t think the problem is that structural adjustment and the cult of comparative advantage have reduced total world food production.

The problem is they have created dependence on import and aide and destroyed small subsistence farms, and that process can’t be reversed quickly – it’s not as simple as returning land to use in food production; certainly not as long as the governments in question abide by the investment protection treaties that are sold as “free trade” to workers and peasant everywhere.

29

abb1 04.18.08 at 4:37 pm

Well, for the depreciation trend of the dollar to continue for the next 10-12 years, it seems to me the US government has to be either extraordinary incompetent or outright saboteurish. Clearly not beyond the realm of possibility, but you have to be quite a pessimist to expect this.

30

Sortition 04.18.08 at 4:55 pm

Sortition, there’s a big difference between regarding an economic analysis as credible and agreeing with every point in it.

Fine. But you made no such reservations when we discussed the Stern Review last time.

Are there any other points in the Review that you disagree with? What are the points that you do find convincing?

you should learn to avoid the snarky “gotcha” tone that pervades many of your comments.

I do not believe I employ a “gotcha” tone, and I am not trying to score points. What I am trying to do is engage in a substantive discussion – and I believe I made a substantive point here, in support of my assertion in the thread I linked to that the Stern Review is rose-colored speculation rather than a scientific analysis.

31

Luis Enrique 04.18.08 at 5:47 pm

Christian (28),

I’m afraid I don’t follow your argument. How was a dependency on imports (I assume we’re talking about staple foods) created, if not by a reduction in domestic food output (or equivalently, a failure to expand in line with demand)? And how did that come about, other than a reduction in efficiency (which did happen in some places but was not the rule, I think) or a change of land usage? If the latter, then there will be a pretty quick supply response to higher food prices, won’t there?

Mind you, I’m not familiar with these investment protection treaties you mention – do they prevent changes in land usage? I don’t see how investors are protected by stopping them from being able to respond to profit opportunities resulting from price increases.

I appreciate that many small farmers have gone out of business – but surely the land has either become farmed by someone else, or if fallow can be put back to use by somebody with a bit of investment? I also appreciate that things aren’t as simple as that sounds, particularly for the benighted subsistence farmers in question, but surely any complications involved in changing what crops are planted will only moderate the supply response, not negate it. The will be many farmers (perhaps most) who are able to change land usage back to food staples.

So I think the point stands: that if higher food prices are to some extent a result of World Bank instigated changes in land use away from food staples, then it can change back again. Unless the price of cotton, bananas etc. have gone up in tandem with rice & wheat, I don’t know about that.

32

Matthew Kuzma 04.18.08 at 6:01 pm

Regarding biofuels from food crops, I’m all for ending the subsidy regime, but I think there’s an underlying technical virtue to crop-based fuel that shines through a lot of the logistical problems. I would definitely agree that the eventual use of switchgrass and the like will be a good thing, but I don’t think ethanol from corn is as bad as so many people seem to believe.

For one, corn is a pretty terrible food. It’s unhealthy for humans, it’s unhealthy for cows, and the current proliferation of corn in the US is arguably the single greatest contributor to our ongoing national health problems. I’d personally rather burn corn in my gas tank than drink it in my coke, and it has simply no business being in as many different foodstuffs as it is.

For another, growing our energy is pretty much the only tenable solution for renewable energy. The cost of full replacement of our fossil fuel energy from, say, solar panels is truly astronomical, not to mention the challenges associated with moving that much power around without debilitating losses. Wind energy is pretty cheap to implement, but strictly limited by global weather patterns. Nuclear energy is pretty great and can be made perfectly clean, if not perfectly safe, but it is not by any stretch renewable. Crop-derived energy is the cheapest, most thoroughly tested solution available right now.

There are a lot of problems associated with growing your energy, but a lot of them have very technically easy solutions. Tractors and shipping vehicles running on biodiesel solves a large portion of the petroleum-dependence problem, and organic and sustainable fertilizing methods solves the rest. Competition for farm land is definitely an issue, but as has been pointed out earlier, land use plans at least in the US have been centered around boosting crop prices and limiting production and a reversal in those policies would, I think, go a long way towards solving that problem.

33

Katherine 04.18.08 at 6:17 pm

Re Comment #14: “For 7 of the last 8 years, the world has consumed more wheat than was produced.” Forgive me if I am actually about to ask a really stoopid question, but how is that actually possible? We digging into reserves or something? Can you even have 8 year old wheat reserves?

34

abb1 04.18.08 at 6:28 pm

Solar panels have almost 30% efficiency; biofuel less than 1%, not to mention pollution.

35

magistra 04.18.08 at 6:42 pm

The cost of full replacement of our fossil fuel energy from, say, solar panels is truly astronomical, not to mention the challenges associated with moving that much power around without debilitating losses. Wind energy is pretty cheap to implement, but strictly limited by global weather patterns.

Herman Sheer in Germany seems to be doing a good job on showing the possibilities of ramping up renewables substantially.

36

CalDem 04.18.08 at 7:08 pm

John Q. , is there a good paper yet sorting out , or at least discussing, the roles of oil price increase, biofuels, and increaded demands on rising food prices?

I’d really like to discuss one in my Env Econ class.

37

Richard Cownie 04.18.08 at 7:10 pm

“Solar panels have almost 30% efficiency; biofuel less than 1%, not to mention pollution.”

I think the best I’ve heard of was around 22% efficiency; but anyhow, it’s way in excess of any cycle based on photosynthesis, which is down around 0.7% before you even throw away most of the plant matter and waste energy on conversion.

The difficulty for solar cells is capital cost: but that has dropped hugely (20x ?) over the last 20 years, and a further 3x drop could get us to the $1/peak watt level where it would be very competitive – especially in regions where peak usage is for air-conditioning.

Electric cars are tricky: but plug-in hybrids could manage most commuter travel with renewable electricity, while still allowing (fossil-fueled) longer trips.

The corn-ethanol thing is bunk: sugarcane is a much better way to go.

38

lemuel pitkin 04.18.08 at 7:26 pm

Matthew Kuzma, it appears to me that you have no idea whatsoever what the relative costs are of solar, wind and biofuels.

Am I correct?

39

abb1 04.18.08 at 7:32 pm

Electric cars are tricky only as long as batteries remain as bad as they are now.

As they say, communism is power to the Soviets + cheap solar panels + good batteries.

40

John Quiggin 04.18.08 at 8:20 pm

Sortition: I’ve repeatedly said, including in my last post, that Stern’s estimates of the cost of climate stabilisation are optimistic, but in the right ball park. As well as biofuels, I think he’s over-optimistic about carbon sequestration. But I think he tends to underplay gains from greater energy-efficiency and reduced consumption of energy-intensive commodities. The crucial point of my post is that no credible estimate produces costs greater than about 5 per cent of national income.

41

John Quiggin 04.18.08 at 8:23 pm

On corn in general, the problem with biofuels in the US reflects the generally corrupt politics of corn. It’s the same process that means that most sugar consumption in the US (in soft drinks and so on) is derived from high fructose corn syrup, even though cane sugar is much cheaper. Given the crucial role of Iowa, alluded to above, it seems unlikely this will be fixed any time soon, but it might be possible to pick off biofuel subsidies.

42

Rambuncle 04.18.08 at 8:47 pm

The cost of full replacement of our fossil fuel energy from, say, solar panels is truly astronomical, not to mention the challenges associated with moving that much power around without debilitating losses.

This statement misses another potential benefit of solar – decentralized electricity generation. If you have more localized sources of electricity, you won’t need to invest as much in high capacity wires to move it around, large transformers, etc.

Secondly, what do you mean by “moving that much power around without debilitating losses”? If you mean actual electricity distribution, then we would have the same problem with any energy centralized energy source. If by “moving power around” you mean the production and distribution of solar panels, and whether they are energy-positive, then I will have to defer for now.

43

abb1 04.18.08 at 9:05 pm

No, I think it’s true, with the current technology transmission of electric power is more difficult than that of liquid fuel.

44

Sortition 04.18.08 at 9:55 pm

John,

I took a look at the post you linked to. Your approach is very different from that of Stern, but just as speculative. Your cost assessment relies on your guess for the price elasticity of fossil fuels. Your figure of 1-2 seems very optimistic. In the U.S. we have experienced over a five-fold increase in the price of oil and about four-fold increase in the price of gasoline in the last 10 years, and yet per-capita consumption of oil and gas have not changed much. Can you give your reasoning for your estimate?

45

rcriii 04.18.08 at 10:16 pm

Katherine at #33: We digging into reserves or something? Can you even have 8 year old wheat reserves?

As long as your total consumption exceeds the amount of reserves, you need never eat wheat more than a year old (i.e. you eat the reserves first, then dip into production). Any year that reserves shrink year-on-year, consumption exceeds production, but depending on how quickly reserves shrink, this state of affairs can last quite a while without actually requiring that any wheat be left over from the first year.

If consumption is less than reserves, the situation is more complicated, but presumably (hopefully?), wheat that is too-old-to-eat disappears from the reserve quantity.

46

christian h. 04.19.08 at 12:45 am

luis enrique (31), I wasn’t expressing my view of the problem very well. If peasants own small plots of land and engage in subsistence farming, then they will eat as much of their product as they need for survival and traditionally, the community will create some reserves for bad years. The subsistence farmer doesn’t have to compete with the buying power of, say, meat eaters or drivers in the US.

Now the land is owned by agribusiness producing export crops. In the end, it doesn’t even matter if those crops are actually staples – the peasant-turned-slum dweller won’t be able to afford it.

The obvious solution would be land reform, but as the agribusiness investments are protected and the third world government can’t afford to piss of Western governments by simply nationalizing farmland, that won’t be easy.

The point being that international trade, while it may be make production more efficient, also creates distribution problems. (This isn’t new, read Mike Davis’ Late Victorian Holocausts which studies the way imperialism and market fetishism turned droughts into devastating famines in the late 19th century.)

47

Tangurena 04.19.08 at 1:58 am

@33:

Forgive me if I am actually about to ask a really stoopid question, but how is that actually possible? We digging into reserves or something? Can you even have 8 year old wheat reserves?

We are digging into reserves. Or rather, we’re consuming the left overs of surpluses from the past. Properly stored, year old wheat is fine. If one were to remove oxygen from the storage containers, it will last 30-50+ years.

The column labeled “World ending stocks” is what one should be looking at:
http://www.ers.usda.gov/Data/Wheat/YBtable04.asp

48

almostinfamous 04.19.08 at 2:06 am

@ 23/tom : from the william pfaff article i linked to in comment # 16:

The conventional explanations for the flare in prices are population growth, (misconceived) diversion of corn and soybeans to bio-fuel production, rising Asian and Middle Eastern demand for high-value foods, higher transport costs, and crop failures. Oddly little has been said about the role of speculation in the rise in commodity prices generally and specifically in food.

On the Chicago CME Group market, which deals in some 25 agricultural commodities – it is a merger of the former Chicago Mercantile Exchange and Chicago Board of Trade – the volume of contracts has increased by 20% since the start of the year and now has reached the level of a million contracts a day. This will soon exceed the rate of growth reached in all of 2007.

The hedge funds are now active in commodities and are playing the futures contracts, where upwards of 30 million tons of soybeans for future delivery are contracted for every day. They are also buying the companies that stock grains.

The argument sometimes is made that this speculation is unimportant because the futures speculators will never take delivery; but this is precisely the problem. It is why this speculation is highly destructive of the true market.

Futures purchases of agricultural commodities classically have been the means by which a limited number of traders stabilized future commodity prices and enabled farmers to finance themselves through future sales.

Speculative purchases have no other purpose than to make money for the speculators, who hold their contracts to drive up current prices with the intention not of selling the commodities on the real future market, but of unloading their holdings onto an artificially inflated market, at the expense of the ultimate consumer. Even the general public can now play the speculative game; most banks offer investment funds specializing in metals, oil, and more recently, food products.

49

almostinfamous 04.19.08 at 2:07 am

hmmpf all of that is supposed to be block-quoted

50

abb1 04.19.08 at 9:36 am

It is why this speculation is highly destructive of the true market.

Yeah, I think I read something similar about the oil prices starting going up after a futures market for crude oil was created. But what’s the cause and what’s the effect here? Do prices go up because of the speculations or does the amount of speculations increase as the commodity becomes scarce? The latter seems like a better explanation, though, I suppose, futures markets don’t help either, creating, in effect, a middle-man (a monopoly, perhaps) between the producers and consumers.

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Tom 04.19.08 at 5:59 pm

Almostinfamous, thanks I had a sense from elsewhere that this might be happening. Does anyone have a few on the scale of trading and the extent to which it is realistic to suggest it could affect prices? Is 30 million tonnes of soyabeans alot, for example?

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Luis Enrique 04.19.08 at 6:01 pm

Christian (46), thanks for the clarification. I’m still not sure I agree.

“Now the land is owned by agribusiness producing export crops. In the end, it doesn’t even matter if those crops are actually staples – the peasant-turned-slum dweller won’t be able to afford it.”

But the peasant-turned-slum dweller has to buy food somewhere, the problem being now that the prices have shot up. If those agribusinesses switch back to staples, it will matter, in so far as it bring prices down.

I’m not sure what land reforms you have in mind, but if it’s giving land back to small subsistence farmers, I’m not sure that’s the way to go. Paul Collier makes an argument for more agribusiness, not less, here .

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Tangurena 04.19.08 at 6:14 pm

@31:

How was a dependency on imports (I assume we’re talking about staple foods) created, if not by a reduction in domestic food output (or equivalently, a failure to expand in line with demand)? And how did that come about, other than a reduction in efficiency (which did happen in some places but was not the rule, I think) or a change of land usage?

Hybrid and GM seeds require far more fertilizer and pesticides than traditional crops. If one tries to grow them with the same lack of modern (read: expensive and imported) fertilizers, herbicides and pesticides, then one has even lower yields than traditional landraces. Traditional cultivation involves saving a portion of one’s crop to reseed the fields the following year. The phrase “eating one’s seed corn” represents the destruction of one’s future (one should also note that “corn” is a generic european term meaning “grain” and typically represents the predominant grain of the area).

Due to legal (genetic patents and other IP treaties) and technical reasons (hybrid seeds don’t “breed true” which is by design, and Monsanto has been adding “Terminator” genes which prevent the harvested seed from germinating at all), farmers then become locked into an expensive cycle of expensive seeds, expensive fertilizers and expensive pesticides. This is again by design as it increases corporate profit at the expense of everyone else.

Here is one local tale of the legal troubles that a farmer can get into when GM seed blows into his fields:
http://www.motherjones.com/news/feature/2000/12/schmeiser.html

If the latter, then there will be a pretty quick supply response to higher food prices, won’t there?

To afford the newer inputs requires borrowing capital for the seed, the fertilizers and so on. When we dump subsidized crops onto the world market, those farmers can’t always recover the input costs and end up bankrupt (which answers your 2nd question). In general, the folks then able to purchase the failed farmers’ assets aren’t other farmers as they’re cash strapped as well, but instead corporations.

Here’s one older story from BBC about debt leading to high rates of farm suicides in India:
http://news.bbc.co.uk/2/hi/business/5312600.stm
In the 80s in the US, suicide was the leading cause of death among rural men. This was during the reagan era’s “get big or get out” farm push. Smaller farmers found themselves cut out of subsidies and lending.

I’m also reminded of some news stories about large French corporations growing beans in one African country (I think this was late 80s, early 90s), and when the crop/market price collapsed, they let the crops rot in the field, while neighboring tribes (who had been pushed off the land these crops were growing on) were starving.

Metanote 1: it appears that 2 links is the max per post.
metanote 2: is it me, or is the preview pane broken?

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lemuel pitkin 04.19.08 at 8:31 pm

a reduction in efficiency (which did happen in some places but was not the rule, I think)

An interesting issue here is, “efficient” in terms of what?

Subsistence farmers typically over-supply labor, relative to its cost as measured in the local wage (yes, family members can and do leave the farm to engage in wage labor, but the various costs associated with this mean that the opportunity cost of additional labor input to the farm is very low, even if not strictly zero.) This kind of labor-intensive agriculture often has per-acre yields above those of modern, capital-intensive agriculture.

When subsistence farmers are replaced by larger commercial farmers, yields may well drop as land and capital are substituted for labor. basically, you end up with a new equilibrium, which is more efficient with inputs measured at cost but may be more or less efficient in terms of yield.

Historically, this process has been essential to development because it frees up labor for more productive uses. But in countries with a labor surplus, there may be no alternative employment for the displaced farmers. In this case, the greater efficiency of the commercial farm is a mirage — it really just represents a shifting of the subsistence cots to other sectors.

This is the situation in much of the third world — perfectly “rational” market processes may replace traditional agriculture with a stable equilibrium where overall output is lower.

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lemuel pitkin 04.19.08 at 8:54 pm

(I think Prebisch developed this idea….)

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Luis Enrique 04.20.08 at 6:27 pm

Lemuel, can you dig out a link, perhaps to a Prebisch paper, to where this idea is articulated? I had a bit of a google, but no luck.

“This kind of labor-intensive agriculture often has per-acre yields above those of modern, capital-intensive agriculture”

my instinctive reaction is to doubt that – but I don’t have data. Can you point me to any?

Lewis is who springs to mind when it comes to surplus labour – and he thought increasing agricultural efficiency was key to poverty reduction.

This is the thing that interests me though: “But in countries with a labor surplus, there may be no alternative employment for the displaced farmers.”

In what circumstances is there alternative employment for displaced workers, and how effective/realistic is the idea that increased efficiency reduces the real cost of food, and the income effect raises demand in other sectors? Do gains in agricultural efficiency require a (possibly state initiated) complimentary ‘pull’ from industrial development?

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SamChevre 04.22.08 at 1:07 pm

John, re your #41–the use of corn syrup instead of cane sugar in the US is not a “politics of corn” issue–it’s a “politics of sugar” issue. The US sugar price is about 3x the world price because of tariffs and import restrictions; that pushes consumption to corn syrup. (The key state is Florida, not Iowa.)

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