The "Food Squeeze" is a global phenomenon. It doesn't matter whether you like pasta, tortillas or rice: prices are up and are set to go even further. Basic food commodity prices have been moving up steadily for quite some time now. In France alone, grain stockpiles are down to the levels of the early 1970's. Those were record lows by their own standards and therefore we are witnessing an unprecedented food squeeze. So far in Europe the effect has been dampened somewhat by the strong Euro and its relative trading strength.
There's also another, albeit temporary cushion that lies in the use of commodity based instruments and derivatives such as futures and forwards. Major food firms such as ADM, Cargil, General Mills, Kellog and Phillip Morris employ these hedging instruments to protect themselves against cyclical spikes associated with the volatility of commodity markets. For consumers it creates a delaying effect, which means that in many cases you don't feel the immediate hike in food prices - at least not as fast as energy prices.
However, bioflation is going to end up on everybody's plate at some point. Part of the food squeeze is coming as a direct result of the rapid industrialization of India and China. When agricultural laborers move into the city, their production output is lost from farms. Industrialization could theoretically mitigate these effects by further mechanization, fertilization, economies of scale and other capital intensive processes to ramp-up output. But that takes time and money. For now at least, laborers are choosing to go to the city rather than ramp up their own agricultural output. One would expect higher food commodity prices to be an incentive for higher production. But this is not expected to happen overnight, and things are further complicated by the bioflationary effect of a growing biofuel economy that links food prices with energy prices.
Given the sheer size of the Chinese economy and its impressive growth rate, China consumes a significant and growing slice of world wide food production. This is expected to increase in tandem with slowing food production. Net food output in China can no longer keep up with demand. As China grows and develops, its citizens will have more income to dispose on food. This increased spending power is now resonating on world markets for grains, meats and fish.
Food prices also have a stronger impact on developing countries than on developed countries. In China, on average, 34% of disposable income may be spent on food. In the U.S. this figure is less than half. Nonetheless, food prices are amongst the highest risers in core inflation figures for the USA. On a macro scale, for now this only slightly affects demand for other goods. In developing countries it remains to be seen how adversely these price hikes will affect overall economic growth. For the worlds poorest, the news could be rather bad, as the UN recently announced it could no longer afford to feed the world.
The production of food is really part of a larger structural problem, as you may or may not know/remember from your typical Economics 101 course. Food is an inelastic good: everybody has to eat and substitution is really not an option. Given the trend of industrialization, lagging production, climatic challenges and other side effects of bioflation, food prices are expected to stay in a strong upward trend. The chain is deeply inter-connected (i.e. grain is not only used in domestic consumption for bread, but also to feed pigs, poultry and other animals). This means that as prices for grain go up, so do the costs of producing meat and other related products.
With production not keeping up and inventories at record lows, the pain that occurs when China buys food "en masse" on the world market will be felt by everyone. Indirectly, this bioflation is going to add to global inflation and possibly hamper growth and development. Additionally, with higher future inflation expected, the inflation targets of central banks world wide will most likely come under renewed pressure. This ultimately means higher interest rates, and thus more expensive capital. Just last week we saw what credit repricing did to world markets. It sent shock waves throughout the financial world. If last week's "correction" was just a speed bump on the road to further economic growth (as predicted by most economists) then it would be wise to investigate what further bioflation will do to the world economy.
There's also another, albeit temporary cushion that lies in the use of commodity based instruments and derivatives such as futures and forwards. Major food firms such as ADM, Cargil, General Mills, Kellog and Phillip Morris employ these hedging instruments to protect themselves against cyclical spikes associated with the volatility of commodity markets. For consumers it creates a delaying effect, which means that in many cases you don't feel the immediate hike in food prices - at least not as fast as energy prices.
However, bioflation is going to end up on everybody's plate at some point. Part of the food squeeze is coming as a direct result of the rapid industrialization of India and China. When agricultural laborers move into the city, their production output is lost from farms. Industrialization could theoretically mitigate these effects by further mechanization, fertilization, economies of scale and other capital intensive processes to ramp-up output. But that takes time and money. For now at least, laborers are choosing to go to the city rather than ramp up their own agricultural output. One would expect higher food commodity prices to be an incentive for higher production. But this is not expected to happen overnight, and things are further complicated by the bioflationary effect of a growing biofuel economy that links food prices with energy prices.
Given the sheer size of the Chinese economy and its impressive growth rate, China consumes a significant and growing slice of world wide food production. This is expected to increase in tandem with slowing food production. Net food output in China can no longer keep up with demand. As China grows and develops, its citizens will have more income to dispose on food. This increased spending power is now resonating on world markets for grains, meats and fish.
Food prices also have a stronger impact on developing countries than on developed countries. In China, on average, 34% of disposable income may be spent on food. In the U.S. this figure is less than half. Nonetheless, food prices are amongst the highest risers in core inflation figures for the USA. On a macro scale, for now this only slightly affects demand for other goods. In developing countries it remains to be seen how adversely these price hikes will affect overall economic growth. For the worlds poorest, the news could be rather bad, as the UN recently announced it could no longer afford to feed the world.
The production of food is really part of a larger structural problem, as you may or may not know/remember from your typical Economics 101 course. Food is an inelastic good: everybody has to eat and substitution is really not an option. Given the trend of industrialization, lagging production, climatic challenges and other side effects of bioflation, food prices are expected to stay in a strong upward trend. The chain is deeply inter-connected (i.e. grain is not only used in domestic consumption for bread, but also to feed pigs, poultry and other animals). This means that as prices for grain go up, so do the costs of producing meat and other related products.
With production not keeping up and inventories at record lows, the pain that occurs when China buys food "en masse" on the world market will be felt by everyone. Indirectly, this bioflation is going to add to global inflation and possibly hamper growth and development. Additionally, with higher future inflation expected, the inflation targets of central banks world wide will most likely come under renewed pressure. This ultimately means higher interest rates, and thus more expensive capital. Just last week we saw what credit repricing did to world markets. It sent shock waves throughout the financial world. If last week's "correction" was just a speed bump on the road to further economic growth (as predicted by most economists) then it would be wise to investigate what further bioflation will do to the world economy.
16 comments:
This just doesn't make any sense. All the industrialized countries produce vastly more food than they can consume and export -- mountains of good the government pays 'em not to put on the markets to keep prices from collapsing. Hell, even dead farmers in America are getting massive subsidies.
People who move into Chinese cities won't suddenly start to eat more. Most CHinese and third world farming is subsitence farming, barely enough for their own families to eat. If you think farmers in rural India or China are producing enough food to export, you're dreaming.
Indeed, with genetically modified crops coming online with far greater resistance to drought and pests and disease, crop yields are set to rise dramatically -- and thus food prices should drop dramatically in the coming years.
This entire article couldn't possibly be more wrong. It's cosmically wrong, epically wrong, flatly false on a level that makes the flat earth theory looks accurate by comparison.
thank you for your comment.
It does make sense. the US for example has become a net importer for corn rather than an exporter. worldwide food stocks are at all time low. The inventory figures are there to prove it. More proof can be found in the trade figures as well as the commodity indices.
Workers moving from rural areas to the city creates more growth in chinese economy by adding to the labor force. This increases consumption and demand for food stocks. And because many of those workers came from farms in the first place, output in rural areas drops. It's really basic economics.
Secondly, the amount of arable and productive land is NOT increasing with demand. Slash'n burn farming in dev. countries does not add to longterm output due to the soil erusion and environmental damage it brings. Farming itself is becoming more capital and resource intensive in order to keep up with demand Higher prices are going to stimulate demand, but it remains fairly inelastic given the constraints. Therefore yes, given the environmental and economic circumstances food production will lag behind demand, significantly adding to bioflation.
it is not a dream but reality, and for some a nightmare.
With the move to food based energy production – bio fuels - thus there is another demand for the basics like corn. Corn going to the production of ethanol rather than food production, directly or indirectly (vial animal feed stocks), is raising the cost of the basic commodity.
Also look at the secondary products - like fertilizer. Several fertilizer stocks are up 10x - Terra Nitrogen
This is going to have a very large effect on the developing nations who are not producing enough food already. The Mexican population just saw the rise in price of their basic food staple - corn, to the point that they are unable to afford the basic component of their diet.
You might say it does not make any sense, but take a look.
Here in the US, you use (last year) be able to buy corn on the cob, 10 ears for $1. Now its 20 for $10 or 50 cents an ear - in one YEAR. Take a look at the ads in your local paper. Ask you Mom or your Wife - if you do not believe me. Or better yet, take a trip down to the supermarket and look at the prices for yourself. Milk use to be $1 a gallon - now its $3. Kraft Macroni and Cheese use to be 5 cents a box when I was going to college (30 years ago), lately it was 40 cents, now its approaching a $1 a box. Rommon noodles the staple of college kids - take a look at what they are selling for.
Now that they want to use food as fuel, the basic inflation of food is really starting to kick in.
That's exactly it...subsidizing biofuels is the real culprit here, and the author failed to touch on that main point. Chinese migration has nothing to do with this.
Farmers used to grow corn and sell it. Now they turn it into energy-inefficient automobile fuel thanks to massive and misguided US government subsidies.
Anyone who believes genetically modified crops are what is going to change the world: keep dreaming. We don't know what's in them, we don't know the long term effects, and the companies that make them only want to make as much money as possible, to the exclusion of all other considerations.
I don't mind oncoming food shortages because I don't like the way the human species is treating the world.
We're due for a hard reset. I won't mind if that happens at the cost of a few billion lives. They'll be great fertiliser.
Could you cite a few supporting statistics?
You are right in pointing that I did not mention the effect of ethanol and biofuel on food inflation.
That was mentioned in a previous article
http://weekendeconomist.blogspot.com/2007/07/truth-relativity-and-markets.html
and this one back in january also touched on it
http://weekendeconomist.blogspot.com/2007/01/26.html
its good to see people becoming awake to the issue at hand.
Paraphrasing Peter Drucker, at the end of World War II, agriculture formed 25 percent of the US working population. The US still has the world's strongest agricultural base, though farmers now constitute only 3 percent of workers.
This eightfold increase in per worker productivity shouldn't be discarded out of hand, it will have a dramatic effect on the outcome of your Malthusian proposition.
While I agree the need for food is inelastic, what you consume is not. Much of the demand for grains is driven by the need to feed livestock, which in turn has high costs per calorie. If food costs do go up, demand will just shift to the more reasonably priced grains themselves, instead of meats. The question may shift to one I now ask you:
"Where's the beef?"
great to see this discussion going.
its true that we can substitute meat for veggies. however that doesn't change the overal dynamic of food that much.
people have been asking about statistics. most of them are on my work computer as e-views models or as excel output. the basic commodity trends should speak for itself:
http://futures.tradingcharts.com/hist_BA.html
thats the fut. price of barley
http://futures.tradingcharts.com/hist_CN.html
some of the other ones, for those to have access to bloomberg or other trade terminals it should be easier
To Anonymous in comment # 3,
“Here in the US, you use (last year) be able to buy corn on the cob, 10 ears for $1. Now its 20 for $10 or 50 cents an ear - in one YEAR.”
----It would be very interesting to investigate more thoroughly the true reasons behind such a dramatic grocery corn prices increase, before precociously directly blaming it on bioflation. Where does the corn sold at your supermarket come from?
“Kraft Macroni and Cheese use to be 5 cents a box when I was going to college (30 years ago), lately it was 40 cents, now its approaching a $1 a box. Rommon noodles the staple of college kids - take a look at what they are selling for.”
----With all due respect, such emotionally persuasive arguments can hardly count as direct evidence of bioflation. There can be a multitude of (ir)regular economic factors such as normal inflation, dollar weakening, etc. that over such a “historically impressive” period as 30 years would inevitably lead to the above stated price increase.
As far as I am concerned, the author is trying to warn us, by presenting both less and more obvious evidence of the potential threat of bioflation - omens that aren’t easily observed and consequently can be easily disputed, otherwise the issue at hand would not be discussed.
Currently, the threat argued is traceable in something less perceptible than supermarket end product prices.
as a rather old economist I agree with the rather insightful and creative analysis of this author.
supermarket prices do give a delayed picture of real prices. Due to the use of commodity hedging instruments that agri-food related business use. The most direct evidence for bioflation can be found in the changing food consumption patterns in the chinese economy. Not to mention the increased use of corn and other staple crops in the biofuel industry.
The Biofuels Ecohypocracy article is also very good for a blog.
Where is this economist employed? Do you use the research of your bank/university/other firm?
impressive blog
A decrease in food stockpiles is a good thing - it means that the world's supply chain is becoming more efficient. While it may be true that a more shallow supply chain is more susceptible to shocks, a truly optimized supply chain is one that has the minimum inventory while accounting for uncertainty - lower inventories is generally a good sign, not a bad one.
Additionally, food is an elastic good. As a category, it is inelastic, but the particular kinds of food are very elastic. People eat almost pure starch when they are poor and quickly convert to a high meat diet when rich (in general, I haven't forgotten the vegetarians).
Also to the guy who is paranoid about GM food, 2 points:
1. You're paranoid. Get over it.
2. Because of people like you, companies are doing the GM research and then using old fashioned breeding techniques to create (nearly) identical plants and animals that don't have to bear the GM label. GM food is coming whether you want it or not.
The two greatest factors creating more expensive food in the US:
1) weakening US dollar
2) biofuels
The term "biofuels" is misleading, really, and maybe you can substitute "agrofuels" instead. "Biofuels" suggests something intrinsically ecologically friendly, which these fuels are not -- they're leading to food cost increases (starvation for some), and destruction of natural habitats for commercial gain.
True, agrofuels are better than fossil energy, but they're a facet of industrial agriculture and are not a truly sustainable solution.
the term agrofuels is actually more fitting rather than biofuels.
thank you mr/ms anonymous
Purely following the recent discussion development, and after investigating the etymology of the prefix "bio-", would it make sense for mr. (weekend)economist to reconsider "bioflation" in favor of (though a less melodious term) - "agroflation"?
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