The era of cheap food may be over

By Larry Elliott, www.guardian.co.uk
2 September 2012 The last decade saw the end of cheap oil, the magic growth ingredient for the global economy after the second world war. 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% a year. Nor is it simply that China has been growing at 9% 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 70m mouths to feed every year, which will result in a 50% increase in demand for food by 2030. Meanwhile, the amount of arable land per person will continue its long-run 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 100m 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 $100 a tonne this summer. The latest data from the World Bank showed that food prices rose 10% between June and July and have now exceeded the previous peak in early 2011. 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 in order to save money on expensive feed. But 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 in 2013 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 $14bn-dollar disasters in 2011 – an historical record – including a blizzard, tornadoes, floods, a hurricane, a tropical storm, drought and heatwaves, and wildfires.” The current year has already seen wildfires, a windstorm, heatwaves in much of the country and the most severe drought in half a century. […]