Their prices have relentlessly marched upwards in the past year and they have the dubious honour of contributing to the current plight of food price inflation that is gripping the world.
Over the last 12 months, the world has experienced a substantial inflationary shock in the form of higher food prices. Prices of wheat, corn, and rice futures on the Chicago Board of Trade are 95%, 30% and 109% higher respectively than a year ago, ending years of relatively stable or falling prices. The factors driving up the price of food have been well talked about. The devastating effect of droughts hitting the grain crops in Australia, floods wrecking the rice harvest in Bangladesh, low levels of stock, and the higher cost of energy and transport have all contributed. The growth of emerging economies such as India and China in the past decade has led to increasing wealth of its population driving up consumption of meat and dairy products which would have been previously considered a luxury.
More recently there has been one other stronger attributable factor – the rise of biofuels. Increasing awareness of the need to combat climate change has increased the demand for renewable energy sources with ethanol the chief among them. Ethanol is made from corn and mixed with gasoline to power cars. Although this approach to diversifying away from dependence on Middle-East oil is not wholly without merit, its side effects have become all too apparent. Making and transporting ethanol from corn requires as much oil as it takes to produce the equivalent amount of petrol or gasoline. Corn growers in the US get better prices from ethanol producers than food producers which serve to drive up the price of corn and corn feed. This is also exacerbated by government subsidies as land is switched from other crops into corn or rapeseed, having a knock on effect of the price of dairy, meat and poultry prices.
So if the sudden growth of a conscience by the West is driving a large part of the food-price shock, then who faces the consequences? Firstly the industrial countries themselves are not immune to these effects. While the Federal Reserve do not include food prices in its measure of core inflation, the Bank of England does and these inflationary pressures come at a most inconvenient time as it fights to avoid a housing bust and a credit crisis threatening to push the economies into a recession.
However, rising food costs have real everyday consequences to those living in the poorer developing economies for the simple reason that it forms a larger portion of their income, even up to 50-60% in some. With population growth continuing in poorer countries, rising food prices will put increasing pressure on the budgets of the world’s poorest. This has become such a concern as to illicit cautionary statements from the IMF, World Bank and the Food and Agriculture Organisation this week. They unanimously warned that rising costs would wipe out decades of effort to combat global poverty and could trigger further riots throughout the developing world. Already there has been striking and violence in Haiti, Egypt, Yemen, Uzbekistan, Cameroon, India, and Pakistan to name a few.
And what might be the effects on the monetary policy of these countries? As food forms a bigger percentage of the inflation basket, the same global increase of the price of corn, rice and wheat becomes higher inflation in emerging economies. The implication here is that interest rates will need to be higher thereby encouraging capital inflows but if money was to come pouring in too quickly, it could have serious consequences for the region’s economic stability and growth.
Though the situation in general appears dire, the silver lining can be found in potential monetary gains for farmers everywhere and especially those in the poorer rural sector of the developing economies. The higher food prices are prompting another look at farm subsidies that have long plagued the international trading system and EU, on paper at least, has led the way with an undertaking to scrap large-scale food subsidies. The real solutions to global food supply ahead also lie in growing more of it, and more effectively using better agricultural research, higher yielding GM crops and less water. The United States is the Saudi Arabia of food and if it geared up could produce untold quantities of food. However for this it would need to bring an end to subsidising ethanol production and focus away from moving more fertile land over to corn production. I leave you with the very appropriate words of J. R. R. Tolkein, “if more of us valued food and cheer and song above hoarded gold, it would be a merrier world.”
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And finally………. The US federal government is sending each and every one of its citizens a $600 tax rebate. Some smart person worked out - “If we spend that money at Wal-Mart, the money will go to China. If we spend it on gasoline it will go to the Arabs. If we purchase a computer it will go to India. If we purchase fruit and vegetables it will go to Mexico, Honduras, and Guatemala. If we purchase a good car it will go to Japan. If we purchase useless crap it will go to Taiwan and none of it will help the American economy. The only way to keep that money here at home is to buy Hershey bars and handguns, since these are the only products still produced in the US.”
Have a good weekend,
Aparna Ram
Research Analyst