naked capitalism

In a bit of synchronicity, food worries are getting prominent billing tonight in the media. The Financial Times” Martin Wolf sketches out some dimensions of snowballing agricultural problems and possible solutions.

Wolf’s piece endeavors to cover a lot of ground, which means of necessity it gives short shrift to depth. It touches on the central yet only-now-meriting-discussion fact that high productivity agricultural production is energy intensive. It mentions only in passing that scarcity of potable water is also increasingly an issue, and as Australians know full well, agricultural uses often compete with household needs. And creating water for human consumption out of low quality water is often energy intensive (desalination reportedly is, membrane-based technologies far less so). While there are no easy answers, looking at problems in isolation is sure to lead to suboptimal solutions.

It also (an increasing pet peeve) fails to mention that the ag problems is a population and diet problem, and does not consider addressing those issues. Weirdly, there is an assumption that people can’t/won’t change their diets. Yet convention and social norms are very powerful forces. In US, but no one here is talking about the need for people in advanced economies to eat less meat and fish protein (as mentioned, it take roughly 10 grain calories to produce one food calorie). Note that does NOT mean becoming vegan, but shifting the proportions in one’s diet (I’m amazed when I go to restaurants how big the piece of protein is relative to everything else). Will this happen quickly? Unlikely, but not talking about it as part of a program will assure it doesn’t happen at all.

From the Financial Times;

Of the two crises disturbing the world economy – financial disarray and soaring food prices – the latter is the more disturbing….

The recent price spikes apply to almost all significant food and feedstuffs (see charts). Yet these jumps are themselves part of a wider range of commodity price rises. Powerful forces are linking prices of energy, industrial raw materials and foodstuffs…..

So why have prices of food risen so strongly? Will these higher prices last? What action should be taken in response?

On the demand side, strong rises in incomes per head in China, India and other emerging countries have raised demand for food, notably meat and the related animal feeds. These shifts in land use reduce the supply of cereals available for human consumption.

Furthermore, rising production of subsidised biofuels, further 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. The latest World Economic Outlook from the International Monetary Fund comments that “although biofuels still account for only 1½ 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”.

Meanwhile, aggregate production of maize, rice and soyabeans stagnated in 2006 and 2007. This was partly the result of drought. Also important, however, have been higher prices of oil, since modern farming is so energy-intensive. With weak growth of supply and strong increases in demand, cereal stocks have fallen to their lowest levels since the early 1980s. Declining stocks undermine the widely shared belief that speculation has driven the rising prices, since stocks would be rising, not falling, if prices were above market-clearing levels.

Vastly more worrying than speculation is the weak medium-term growth of supply. The rapid increases in yields of the 1970s and 1980s, at the time of 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. The first is the market, which will tend to bring prices back down as supplies expand and demand shrinks. But the 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. The second force is the current intense pressure on the world’s food system. This is true of both demand and costs of supply. Prices are likely to remain relatively elevated, by historical standards, unless (or until) energy prices tumble.

This, then, brings us to the big question: what is to be done? The answers fall into three broad categories: humanitarian; trade and other policy interventions; and longer-term productivity and production.

The important point on the first is that higher food prices have powerful distributional effects: they hurt the poorest the most. This is true both among countries and within them. The Food and Agricultural Organisation in Rome recently listed 37 countries in substantial need of food assistance. Moreover, according to the World Bank, soaring food prices threaten to make at least 100m more people hungry.

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…..

Now turn to the policy interventions. Protection, subsidies and other such follies distort agriculture more than any other sector. Alas, the opportunity to eliminate protection against imports offered by exceptionally high world prices is not being taken. A host of countries are imposing export taxes instead, thereby fragmenting the world market still more, reducing incentives for increased output and penalising poor net-importing countries. Meanwhile, rich countries are encouraging, or even forcing, their farmers to grow fuel instead of food…

Finally, far greater resources need to be devoted to expanding long-run supply. Increased spending on research will be essential, 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. At least as important will be 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.

The food and fuel crisis of 2008 is a cry for our attention. Nobody knows how long these shocks will last. But they demand rapid policy changes across the globe. We must choose between fragmenting world markets still further and integrating them, between helping the poor and letting even more starve and between investing in improving supply and allowing food deficiencies to grow. The right choices are evident. The time to make them is now.