Monday, April 14, 2008

A Few Thoughts about World Food Prices

I guess I noticed it sometime last year, when egg prices at the grocery store doubled, and milk prices were one-third to 50 percent higher than they were just a few months before.

What I observed at the grocery store seems confirmed by a number of reports -- world food prices are increasing across the board.

The thing is, it's not so much that food prices are now higher than they've ever been before, rather, as you can see from the graph below, it's that the last several decades the world has seen relatively low food costs relative to earlier years.

A couple of observations here.

First, from just eye-balling the graph, there seems to be a strong association between oil prices and food prices. The highest spike is in the 1973-74 period when OPEC initiated their first oil embargo. Prices then spiked again around 1979, around the time of the second oil embargo.

Subsequently, oil prices declined significantly (in real terms) and food prices decreased as well. In the last few years, oil prices have increased significantly, and we see food prices spiking again.

To be sure, correlation does not mean causation -- after all, it's possible that the same factors causing food prices to increase also cause oil prices to increase, so the oil price increase does not cause the food-price increase -- nonetheless, the association suggests a plausible prima facie causal influence. For example, oil prices would affect food prices because of transportation needs, fertilizer production, energy needed for tractors and irrigation, and etc.

I also wonder about the effect of the "Green Revolution." No, I'm not talking about environmentalism, I'm talking about the first Green Revolution that started in the 1960s -- the outcome of agricultural research that allowed food production to increase significantly. You wouldn't expect the full effect of this revolution to be felt until its lessons could be fully implemented. A ten-year lag between the agricultural advances and their observation in the fields doesn't seem unreasonable. This, too, would predict lower food prices (relative to the sixties) to start in the mid-1970s.

The thing is, Malthus's logic was never repealed. So a one-time increase in food production relative to the population would mean lower food prices in the short run. Nonetheless, population would, presumably, once again begin to catch up to the new level of food production (as more infants lived beyond their infancy and as people lived longer because of better nutrition). Nonetheless, over time, you'd expect population increases to "catch up" with the increased food production. But as demand increases relative to supply, you'd expect prices to increase as well.

We also hear a lot about bio fuels being a cause -- although that, in turn, would be related to oil prices, as increasing oil prices make bio fuels more competitive. Nonetheless, the figure I hear is that one-third of the U.S. corn crop now goes toward bio fuels. That seems like a high number to me -- I don't see that many people pumping ethanol into their gas tanks, but I have no reason to prefer that sort of anecdotal evidence to hard data. (Although I'm unsure that the "one-third" number is actually hard data. I have yet to learn the source of the number.)

But if true, that number would seem to suggest the need to eliminate government subsidies for ethanol production. It wouldn't seem as though the industry needs them, and farmers don't need the increased demand in order to derive high prices for their crops.

This would also seem to be an opportune time for Washington to repeal agricultural tariffs and farms subsidies. After all, farmers are receiving higher prices for their crops, and poorer Americans would benefit from the importation of cheaper foodstuffs. This would also help increase the production of food in other countries, although I think the net effect would be to increase food prices outside of the U.S., unless food production increased a whole lot as a result of scale economies. Nonetheless, the elimination of tariffs and subsidies would also eliminate dead-weight costs that should leave almost everyone better off.

Another cause might plausibly be increasing affluence in developing countries. India and China, for example, have huge populations and have been experiencing substantial economic growth. Affluence increase food consumption, not only in amount but in degree. For example, even if more affluent people eat the same number of calories per day, they tend to substitute meat for vegetable protein sources. But, of course, an ounce of animal protein take many times the amount of vegetable protein to produce. So demand for grain and other feedstuffs goes up even if average caloric intake does not.

Finally, while it is true that food prices are spiking now relative to the last couple of decades, from the graph we see that real food prices were nonetheless double what they are today during the first oil embargo. Still, the oil embargo was a politically-induced oil shortage. Today's oil prices seem to be more of a reflection of increased demand as industrialization spreads to countries like India and China.

So I don't know. Maybe this is just a temporary spike like the 70s. Or perhaps we're reverting to a longer-term equilibrium of (relatively) high food prices, and the experience of the last twenty years or so will be looked upon as a sort of blessed period of cheap and abundant food. If it is the latter rather than the former, then the church will have her work cut out for her in the decades to come.


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