Wed, Sep 05, 2012 - Page 9 News List

The era of cheap food may be over

A spike in prices caused by poor harvests and rising demand is an apt moment for the West to reassess the wisdom of biofuels

By Larry Elliott  /  The Guardian, LONDON

Illustration: Mountain People

The past decade saw the end of cheap oil, the magic growth ingredient for the global economy after World War II. This summer’s increase in maize, wheat and soya bean prices — the third spike in the past five years — suggests the era of cheap food is also over.

Price increases in both oil and food provide textbook examples of market forces. Rapid expansion in the big emerging markets, especially China, has led to an increase in demand at a time when there have been supply constraints. For crude, these have included the war in Iraq, the embargo imposed on Iran and the fact that some of the older fields are starting to run dry before new sources of crude are opened up.

The same demand dynamics affect food. It is not just that the world’s population is rising by 1 percent a year. Nor is it simply that China has been growing at 9 percent a year on average; it is that consumers in the big developing countries have developed an appetite for higher protein western diets.

Meat consumption is rising in China, India and Brazil, and since it takes 7kg of grain to produce 1kg of beef (and 4kg to produce 1kg of pork), this is adding to global demand.

Farmers have been getting more efficient, increasing the yields of land under production, but this has been offset by two negative factors: policies in the US and the EU that divert large amounts of corn for biofuels and poor harvests caused by the weather.

If the World Bank’s projections are anything like accurate, further massive productivity gains from agriculture are going to be needed over the next two decades.

There will be an extra 70 million mouths to feed every year, which will result in a 50 percent increase in demand for food by 2030. Meanwhile, the amount of arable land per person will continue its long-term downward trend.

The extent of this challenge has been highlighted by the extreme drought in the US this year.

Failure of the maize harvest — down by more than 100 million tonnes on what was expected — has had a knock-on impact on wheat, which has not been affected by the lack of rain. Prices of both crops have jumped by US$100 a tonne this summer. The latest data from the World Bank showed that food prices rose 10 percent between June and July and have now exceeded the previous peak early last year.

It will take time for these increases to have their full impact on consumers. In the short run, the cost of meat will not be affected because there is glut caused by livestock owners slaughtering their herds to save money on expensive feed. However, by the end of the year, food will be dearer.

Central banks are unlikely to tighten policy in response to higher inflation, since the increase is seen as an external shock that will have a depressing effect on the spending power of consumers. They should not, however, assume that the spike will be a one-off, since grain stocks are at such low levels that bad harvests next year would see rocketing prices, probably accompanied by panic-buying, export bans and food riots.

A recent report from Oxfam said the US should expect further severe droughts in the coming decades.

“The US experienced US$14 billion disasters in 2011 — an historical record — including a blizzard, tornadoes, floods, a hurricane, a tropical storm, drought and heatwaves, and wildfires,” it said.

The current year has already seen wildfires, a windstorm, heatwaves in much of the country and the most severe drought in half a century.

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