Food prices are at the centre of the global economic crisis. A billion Asians who spend at least 60% of their income on food now face starvation. There have already been food riots in several dozen countries, and I fear there is worse to come.
As I commented last month, the credit squeeze is largely incomprehensible to ordinary folk – but they instantly feel the pain of soaring prices at food stores.
Governments blatantly manipulate official inflation figures by ignoring “temporary” factors such as the costs of food, energy, real estate and taxes – all the ones that really matter. But consumers are not fooled, and everywhere now look ready to chuck ruling parties out of power.
Nevertheless, this food crisis could lose its sting over the next 12 months.
Consider the reasons for soaring prices of foodstuffs, and the factors that are likely to force them to fall back:
Weather
There have been floods in the grain-growing ‘breadbasket’ of North America, a severe drought in Australia, frosts in Argentina, heavy rains in Europe.
The UN Food & Agriculture Organization recently concluded that “temporary factors, such as drought-related supply shortfalls,” accounted for most of the strength in world market prices for agricultural commodities.
History suggests that weather follows cycles, with good years following the bad. Soon the headlines could be proclaiming record crops – and farmers complaining about plummeting prices.
Biofuels
The ecomania has encouraged governments to introduce massive subsidies to stimulate production of liquid fuels from crops that would otherwise provide food. In the US subsidies of $7 billion a year and other measures are diverting a third of the corn crop — 85 million tons last year — from food supply into ethanol production.
Such a policy is blatantly stupid. But politicians will soon see the need to scrap their obsession with global warming and to focus attention on immediate problems such as starvation in the Third World — and angry voters.
Dozens of ethanol plants are being shut down in any case because, even with subsidies, they are hopelessly uneconomic at current corn and sugar feedstock prices.
The charity ActionAid has called for all biofuel subsidies to be scrapped and diversion of land from food crops to fuel crops to be stopped.
Rising demand
Astonishing economic growth, especially in Asia, is making hundreds of millions of people richer, and one of the first things they do with their new wealth is spend it on eating better – less starch, more fat and high-quality protein.
Ten years ago China consumed barely 1% of world milk production – now the figure is 10%, and consumption is doubling every three years.
The newly-prosperous especially delight in eating beef. That puts grain and soybean supplies under pressure – it takes roughly eight kilograms of feed to produce one of beef.
However, market forces are going to bring an end to the global food crisis…
High prices are going to ease the pressure on demand, now they have reached levels that discourage consumption of expensive high-protein foods.
They are also going to lead to an explosion in production.
Even though farmers complain about the higher costs of fertiliser and fuel, they will buy more of both if they see the prospect of selling their output for much higher prices. According to one report, a farmer who spends an extra dollar on potash sees a return of $3 to $6 that same year from increased yields.
Coming… a third Green Revolution
Farmers will also buy more of the high-yielding, disease-resistant, water-economising seeds from suppliers such as Monsanto and Syngenta, if that’s a way of achieving bigger profits.
The strange European hostility to those companies’ genetically modified seeds – which has no scientific basis – will come under increasing attack. David King, one of the UK’s most influential scientists, said this month that GM is the “only technology” that can deliver the food production increases the world must have.
The production-cutting measures used in Europe and America to support agricultural prices are likely to be dismantled. In a world short of food it doesn’t make sense to use $2 billion of US taxpayers’ money a year to pay farmers to leave uncultivated 36 million acres of farmland, or to force large farmers in Europe to leave 10% of their fields untilled.
Longer-term, agribusinesses are going to mobilise capital to put more land under crops in places such as Brazil and Argentina, Russia and Ukraine, Indonesia, even Africa, with its vast areas of under-exploited fertile soils.
China is buying large tracts of land in the tropics to farm soybeans and palm oil for its needs. South Korea is mooting a 270,000-hectare farm project in eastern Mongolia.
The oil-rich Mideast state of Abu Dhabi is going ahead with a 70,000-acre project in Sudan to secure some of its food supplies (only one-fifth of the 100 million acres of agricultural land in that country is being utilised).
Saudi investors are expected to finance a plan to grow sugarcane, sweet sorghum, rice, soybeans and maize on a million hectares of land at Merauke, an isolated and undeveloped part of Indonesian Papua.
However, those are all long-term plans that will take time to come to fruition. And there are, of course, some negatives that will continue to underpin food prices, such as the lowest global inventories in half a century, high energy costs, desertification and diversion of land to urban/industrial development, and water shortages.
Nevertheless I believe that in a year or three the immediate problem of sky-high food prices will be a thing of the past.
• This article was written by Martin Spring in On Target, a private newsletter on global strategy