Summary:
Martin Wolf on why the price of food has risen and what can be done. Weak growth of supply and strong increases in demand has caused stocks of cereals to drop to lowest levels since 80s. Price hikes not due to speculation. Supply is biggest problem. Prices will remain high until energy prices tumble. Poor most affected. Humanitarian intervention needed. Farming overly regulated. Needs to be market oriented. Move towards genetically modified food in developing countries is inevitable in order to increase productivity.(Published: 29/04/08)
Notes:
- Of the two crises disturbing the world economy - financial disarray and soaring food prices - the latter is the more disturbing
- high food prices threaten unrest at best and mass starvation at worst
- jumps in food prices are part of a wider range of commodity price rises
- forces that link prices of energy, industrial raw materials and foodstuffs
- rapid economic growth in the emerging world
- strains on world energy supplies
- the weakness of the US dollar
- global inflationary pressures
- but: food now hotter issue that normal
- questions: why have prices of food risen so strongly? Will these higher prices last? What action should be taken in response?
- demand side:
- demand for food raised due to strong rises in incomes per head in China, India and other emerging countries
- notably meat and the related animal feeds
- shifts in land use reduce the supply of cereals available for human consumption
- rising production of subsidised biofuels
- stimulated by soaring oil prices
- boosts demand for maize, rapeseed oil and the other grains and edible oils that are an alternative to food crops
- IMF: "although biofuels still account for only 11/2 per cent of the global liquid fuels supply, they accounted for almost half of the increase in consumption of major food crops in 2006-07, mostly because of corn-based ethanol produced in the US"
- supply side:
- aggregate production of maize, rice and soyabeans stagnated in 2006 and 2007
- partly the result of drought
- partly due to higher prices of oil, since modern farming is so energy-intensive
- cereal stocks have fallen to their lowest levels since the early 1980s
- due to weak growth of supply and strong increases in demand
- undermines belief that speculation has driven the rising prices
- if if prices were above market-clearing levels due to speculation, stocks would be rising, not falling
- biggest problem is is weak medium-term growth of supply
- rapid increases in yields of the 1970s and 1980s (the "green revolution") have slowed
- given the stresses on water supplies, longer-term supply prospects would look poor even if diversion of land for production of biofuels were not adding to the pressure
- Are prices going to remain high?
- Two opposing forces are at work
- First force is the market
- will tend to bring prices back down as supplies expand and demand shrinks
- latter is also what we want to avoid, at least in the case of the poor, since reducing their consumption is not so much a solution as a failure
- Second force is the current intense pressure on the world's food system
- true of both demand and costs of supply
- Prices are likely to remain relatively elevated, by historical standards, unless (or until) energy prices tumble
- what is to be done? answers fall into three broad categories:
- humanitarian
- important point: higher food prices have powerful distributional effects: they hurt the poorest the most
- Increases in aid to the vulnerable, either as food or as cash, are vital
- Equally important, however, is ensuring that the additional supplies reach those in greatest difficulty.
- trade and other policy interventions
- Protection, subsidies and other such follies distort agriculture more than any other sector
- rich countries are encouraging, or even forcing, their farmers to grow fuel instead of food
- present crisis is a golden opportunity to eliminate this plethora of damaging interventions
- focus should be on shifting the farm sector towards the market, while cushioning the impact of high prices on the poor
- longer-term productivity and production
- far greater resources need to be devoted to expanding long-run supply
- increased spending on research, especially into farming in dry-land conditions
- the move towards genetically modified food in developing countries is as inevitable as that of the high-income countries towards nuclear power
- more efficient use of water, via pricing and additional investment.
- "People will oppose some of these policies. But mass starvation is not a tolerable option."
