Food

April 16th, 2008

The big increase in food prices over the last six months or so raises lots of issues, of which I’ll try to cover a few.

The first arises from the fact that prices for commodities, including oil as well as most ag commodities, are typically quoted in $US. In a situation where, for obvious reasons, the value of the $US is declining against all major currencies, this can be quite misleading. Measured against the euro, the currency of the world’s largest unified economy, the increase looks a lot less steep. The declining usefulness of the $US as a unit of account is another step in the process of transition away from a world in which the $US is a reserve currency. More on what will replace it soon, I hope.

In substantive terms, the increase in $US commodity prices is a big problem for the many Asian economies that have pursued some kind of peg to the $US as a means of maintaining export competitiveness. The adverse impact on domestic consumers is now becoming obvious, and the only solution is to abandon the dollar peg and allow an appreciation. China is already moving in this direction.

A second important point is the impact of demand from the biofuel sector, particularly for corn in the US. The idea of making biofuels from food crops was always problematic and the subsidy regime in the US makes it more so. The current food crisis should make subsidies for food-based biofuels politically and economically untenable, pushing the industry away from this easy short term solution and in the direction of sources such as switch grass, grown on marginal or non-arable land.

Finally, the biggest increases have been in wheat prices, reflecting the drought in Australia and in some other wheat producing countries (Kazakstan?). It seems likely, though it’s still impossible to prove, that human-induced climate change is increasing the frequency and severity of drought. So, it’s important not to regard climate change as a problem for the future. In all probability, adverse effects are already here.

Categories: Economics - General, Environment Tags:
  1. April 18th, 2008 at 18:28 | #1

    Carbonsink (eager would-be demythologiser): Ender debunked Time’s crummy wording 24 hours ago at comment #24 above.

    Sorry missed that. I’m sure Ender would not dispute the general thrust of the Time piece, being that many biofuels are doing more harm than good. (e.g. US corn ethanol, Brazillian sugarcane ethanol, SE Asian palm oil biodiesel)

    The “Clean Energy Scam” seems like a perfectly valid title for such an article.

    Robert Rapier knows his crude oils OK but he’s alarmist on prospects for new technologies. Sometimes you’d think innovation ended with the dinosaurs.

    Well that’s kinda odd for someone who actually works on new technologies

    Robert Rapier, Engineering Director, Accsys Technologies PLC

    Robert is responsible for global engineering activities. His experience includes engineering roles in R&D, design, process, and production with Celanese, Hoechst, and ConocoPhillips. Robert holds an MSc in Chemical Engineering from Texas A&M University, BSc degrees in Chemistry and Mathematics, and was a recipient of the 1996 Presidential Green Chemistry Challenge award for his graduate school research on biomass chemistry. His previous experience includes cellulosic ethanol, butanol production, oil refining, natural gas production, and gas-to-liquids (GTL) production, and he has been a technical consultant for a number of biofuel projects. Robert holds several US and international patents pertaining to these roles, and has worked in the US, Germany, the UK, and the Netherlands. In his spare time he enjoys writing about energy and the environment for The Oil Drum and his R-Squared Energy Blog, and spending time with his wife and three children

  2. John Mashey
    April 20th, 2008 at 03:57 | #2

    re: #49

    It is a common thing for someone not so familiar with R&D management and/or proposed technologies to say “New technology ABC” will be great, or “no way” based on their leanings.

    Someone with a lot of relevant experience (like Rapier) is likelier to have more complex views.

  3. April 20th, 2008 at 12:15 | #3

    The declining usefulness of the $US as a unit of account is another step in the process of transition away from a world in which the $US is a reserve currency.

    A more stable unit of account would go a long way towards creating a better world. I’d suggest that one with a hard link to commodities would be a good idea.

  4. derrida derider
    April 20th, 2008 at 20:07 | #4

    Terje, please, please don’t suggest that hard link should be to a single commodity – we’ll have the thread flooded with gold bugs before you know it.

  5. April 20th, 2008 at 22:19 | #5

    DD – I’d prefer a single commodity such as gold for pure simplicity and transparency. However I’d settle for the Bancor proposed by Keynes.

    http://en.wikipedia.org/wiki/Bancor

  6. April 20th, 2008 at 22:55 | #6

    Oddly enough, I’ve long thought that silver would be a more generically useful bullion base than gold because it naturally connects to other commodities. That is, not only does it have industrial uses itself, but also about half of world silver production is as a by-product of meeting other needs (lead and zinc).

  7. Ernestine Gross
    April 20th, 2008 at 23:01 | #7

    Re 53 and 54: Gold and silver are not food and their relevance to the production of food is not obvious.

  8. April 20th, 2008 at 23:09 | #8

    Re 55. Read 51 for context.

  9. April 20th, 2008 at 23:10 | #9

    p.s. Hint – US dollars are not food either.

  10. Ernestine Gross
    April 21st, 2008 at 13:04 | #10

    True, Terje, US dollars are not food either. But the US dollar is the unit of account within the USA and a non-trivial amount of international trade contracts, involving food, are denominated in US dollar. Some currencies are pegged to the US dollar, others are not. (See JQ’s post)

    While you promote your theories relentlessly, I nevertheless gained the impression of you having an open mind. So I shall try out an idea for a universal unit of account. I should say up-front that the idea is not fully developed. I shall put some stuff in the form of assumptions to make it easier to pick errors.

    I propose solar energy, measured appropriately, to serve as universal unit of account on the assumption that

    a) all life on earth depends on solar energy.
    b) the total supply of solar energy cannot be manipulated by any human created institutional framework (eg governments, corporations, absolute kings or queens)
    c) in the short run (in terms of notions used by geologists) the supply is unlimited but in the long run the supply is finite.
    d) nuclear power for whatever purpose is ruled out (potentially destructive of life due to human actions).

  11. Ian Gould
    April 21st, 2008 at 15:35 | #11

    PML – I think that silver would be a poor basis for currency for exactly the reasons you describe – the idea of a commodity-backed currency is that the commodity reduces the volatility of the currency.

    The silver price is relatively volatile precisely because supply is dependent on the price of lead and copper and because demand is dependent on industrial applications. (What would the switch from silver-based photographic paper to digital cameras have done to the value of a silver-backed currency?)

  12. April 21st, 2008 at 18:23 | #12

    No, in the short term silver bullion would have a price that reflected carrying costs more than extraction costs. That is, in the short term it would reflect the stock around. In the medium term everything would stabilise via the Pigou Effect once stocks had been set up. The extraction costs would anchor stock levels over the long term.

  13. John Mashey
    April 22nd, 2008 at 07:53 | #13

    #60 Ernestine

    I’m fond of solar energy, but why not the more general case of useful energy, measured in Quads or ExJoules?

    See Lawrence Livermore Energy Flows for example.

    Note: I replied to your helpful comments in another thread, but I think the spam-filters must have trapped my reply. I’ll try to condense and strip out some URLs and try again tomorrow.

  14. April 25th, 2008 at 01:13 | #14

    So is anyone here prepared to acknowledge, now that the horse has bolted, that Thomas Malthus, Paul Ehrlich and the Club of Rome were right?

  15. jquiggin
    April 25th, 2008 at 09:31 | #15

    In a word, No.

  16. jquiggin
    April 25th, 2008 at 09:36 | #16

    In a longer word, more people are eating better than ever before. That’s the primary cause of rising prices.

  17. wizofaus
    April 25th, 2008 at 09:46 | #17

    There’s still plenty of scope for many of the possible scenarios the Club of Rome outlined to unfold. It is a tad concerning that evidence of energy and food shortages is already starting to come to the fore when there’s still at least another 50 years of strong population growth expected.

  18. wizofaus
    April 25th, 2008 at 09:48 | #18

    Also, John, that pattern (more people eating better than before) has been true since the end of WWII, yet prices, until about 5 or so years ago, had been going down. Now they’ve steadily been going up. Further, it’s not clear that the rise of India and China have all that much to do with it, give they’re still self-sufficient in food production (as I understand it).

  19. Greg Wood
    April 25th, 2008 at 16:48 | #19

    Re Johns’ longer word, there are also more people eating worse and catastrophically less than ever before.

    Nothing like selectively quoted data to ‘prove’ an economic viewpoint.

  20. jquiggin
    April 25th, 2008 at 19:41 | #20

    #69. This is incorrect. On most measures, the absolute number of hungry and malnourished people has declined in the last two decades.

  21. April 25th, 2008 at 20:26 | #21

    Ah… JQ, remember survivor bias. Absolute numbers go down when conditions get seriously worse as well as when they improve. I take it that GW’s “worse and catastrophically less” is asserting that the former is happening, though somewhat ambiguously; if so, your assertion could still be true without refuting his.

  22. Greg Wood
    April 25th, 2008 at 23:40 | #22

    Where is this notion of reducing hunger numbers substantiated?
    A cursory check revealed the snippets pasted below that seem to indicate otherwise.
    (How do we factor the millions of Anglophones who have high calorie intakes but abysmal nutritional standards?)

    Considering the implications of peak oil, climate change and heavily, increasingly urbanised populations everywhere, it is hard to see these conditions getting better.
    The difference between current popular perception and Malthusian reality is oil and a very tenuous hold upon the vast complexities being wrestled with and compounded with every new ‘silver bullet’.
    People can believe otherwise but there is no proof anywhere of the capability of the technologies that are being presumed to be able to maintain some form of systemic stasis – including growth!! There is only hope for these things. A hope that is practicably diminished via the bullishness of the belief – especially toward growth as being sustainable.

    From UN press release on FAO report – 1998:

    The number of undernourished people in the world has increased since the early 1990s, mainly because there has been little progress in reducing poverty, according to new estimates released today in the annual United Nations Food and Agriculture Organization report The State of Food and Agriculture 1998 (SOFA 98). The report notes the rise in the number of hungry people, despite significant reductions in hunger and malnutrition in several developing regions.

    “The total number of chronically undernourished people in developing countries is now estimated to be 828 million for the 1994-1996 period”, up from 822 million for 1990-92, according to the report.

    However, the overall percentage of malnourished as a part of the world population has declined over the same period from 20 to 19 per cent, the report says, adding that this has not been sufficient to compensate for population growth.

    Josette Sheeran (World Food Program Executive Director), quoted in interview 2007:
    “We’ve made gains against hunger in the world over the past few decades. Yet because of population growth in some of the world’s poorest regions, we have — in absolute numbers — more hungry people today than ever before”.

    The Independent
    Philip Thornton, Economics Correspondent
Monday, 16 October 2006
    Today should have been a day for a celebratory feast. Exactly 10 years ago 176 world leaders at the World Food Summit pledged to halve the number of undernourished people by 2015.
    Instead it is a day for commiseration and recrimination. More than 850 million are still hungry – some 18 million more than in 1996.

    From US Dept. Agriculture Economic Research Service report (2006):
    Preliminary estimates indicate that the number of hungry people in 70 lower income countries rose between 2005 and 2006, from 804 million people to 849 million.

    From:
    African Union – STATUS OF FOOD SECURITY AND PROSPECTS FOR AGRICULTURAL DEVELOPMENT IN AFRICA – 2005
    Twenty seven percent of the African population is estimated to be “under-nourished� or hungry and this percentage has only declined by two percent (from 29 percent) over the 10 year period of 1990/02-2000/02. Since Africa’s total population has increased from 589 million to 764 million over the same ten year period, the estimated absolute number of under-nourished people has risen from 176 million to 210 million, a 20 percent increase. UNICEF estimates that 39 percent and 29 percent of African children less than five years were stunted and underweight respectively, over the 1995-2002 period.

  23. wizofaus
    April 26th, 2008 at 06:22 | #23

    Thanks for those figures Greg. Of course ultimately the problem will solve else, as starvation and reproduction are not compatible.
    But the amount of human suffering that such a statement hides is too much to contemplate.
    Humanity as a whole may not be in “overshoot”, but sub-Saharan Africa almost certainly is.
    If the human population doesn’t reach 9 billion, it will be because of starvation on an unprecedented scale in that part of the world.

  24. wizofaus
    April 26th, 2008 at 06:23 | #24

    (Ack. “solve else” = “solve itself”. Where’s that preview button!)

  25. Greg Wood
    April 26th, 2008 at 11:51 | #25

    I’ve just read John’s comments to ABC reporter Annie Guest re the proposal by the new Sunshine Coast Mayor for a population cap across the region’s planning zonings.

    John states:
    “I think it would be much better, rather than looking at an aggregate like that, to look at the question of what kinds of economic activities we want to encourage in the Sunshine Coast and in the Australian economy more generally”

    John, such ‘learned’ comment is just plain silly at best and nefariously empty consternation at worst. Quite obviously one can’t be done without the other.

    Presently the Sunshine Coast ‘economy’ is, as is the SEQ economy generally, pressing all of its eggs into the housing and bulk tourism baskets and consequently pushing for as many people as possible to arrive to float that boat.

    Of course a different population strategy requires a different industrial outlook. But for as long as the population flood is seen as inevitable and unmitigable then housing rules. And thus so does the cataclysmic ingress. And it is cataclysmic, by many measures.

    Bob Abbott says population cap because that is what he knows it as. He’s a simple bloke with a huge ego, like a lot of our politicians. However he does seem to want to do well for people though if he can, which sets him apart somewhat from the political flock. And he does hove some Councillors in the new group who do know precisely what they are talking about.

    What he is really proposing, which is what was lost with the amalgamated decimation of the Noosa planning scheme, is a strategic plan that mindfullly calculates zoning zields and balances these demand numbers against natural resource levels and clearly determined, fully costed and securely scheduled infrastructure provisions. Within this broad equation sits economic and social engagement development strategies.

    This process is called planning. It is an unfamiliar concept because the vast bulk of the nation’s ‘planners’ are frauds and syncophants within a self-serving, self-perpetuating system of zero-sum resource liquidation dressed up to look like development.

    Humans have a terrible capacity to beleive that anything most of them agree upon, or hear of often enough from familiar sources, is reality. Even if it is, in simply demonstrable physical fact, a death march. It takes leadership to bridge the perception barriers around a deeply flawed social momentum. You are a prominent person John, and your opinion carries some public weight, but are you a leader or a follower?

    Your reported comments add deadly confusion not clarity to this hugely vexed but vital change, and act as a political sea anchor, rather than the bouyancy and propulsion device they should be if social sustainability, security and wellbeing is your aim. Maybe you could better address this landmark issue in a new entry.

  26. jquiggin
    April 26th, 2008 at 13:49 | #26

    Greg, the aggregate I was referring to was GDP, not population. My point was that a strategic plan needed to look at the nature of economic activity, not the gross value added in production.

    As a general point, your comments since you arrived have been quite aggressive in tone. Please try and avoid this in future.

  27. Ross
    April 27th, 2008 at 11:15 | #27

    Price supports contribute in equal measure to trade barriers in the escalation of global food prices. This applies both to supports in developing countries and the EU/US.

    The EU/US policies however sustain the whole as a globally low productivity degenerate system. Their trade barrier policies restrict the flow of capital to more productive broad acre farming opportunities in other geographies (a well capitalised broad acre venture will be far more productive but lose out commercially to price/barrier supported competitors).

    As stated elsewhere in this blog, the Chinese and Indians have been successfully chipping away at productivity. Stalin’s purges of the unproductive peasants isn’t an option thank God. Both India and China have genuine reason to fear their peasants (Maoists in India and the peoples army in China being the peasants protector). At the time of Tianemen Square food price inflation had occured as a result of the removal of key agricultural price supports and the inefficient automatic guarantee of public sector cadre jobs to uni students had been announced. This has subsequently had a massive positive effect on the Chinese economy and agricultural productivity and the lives of the peasant farmers (even if so many of them have had to migrate to urban areas).

    But in so many areas of the world the price supported “market gardener” producer is the political problem. From Thailand, to Arkansas, to the fields of France, and to Africa. Managing the transition to well capitalised broad acre farming and balancing social cohesion with productivity is the issue rather than the totally discredited Malthusian hysteria that is rolled out by commodity speculators and EU environmental fraudsters.

    The environmental issues of inputs and global aggregate acreage have a life outside the main issue that affects productivity and food pricing. So too does the displacement issue of fuel where sugar cane and corn are have very different dynamics in factors relating to land use and productivity. And I think your previous blog correspondent is using very dodgy numbers trying to run down the Brazilian success in displacing oil with cane bio.

  28. April 27th, 2008 at 15:09 | #28

    Greg Wood wrote:

    “Presently the Sunshine Coast ‘economy’ is, as is the SEQ economy generally, pressing all of its eggs into the housing and bulk tourism baskets and consequently pushing for as many people as possible to arrive to float that boat. …”

    Thankfully, this fact has been recognised by some business leaders on the Sunshine Coast. This has been reported in the story Coast told to grow up and diversify by Bill Hoffman in the Sunshine Coast Daily News of 26 April 2008.

    A spokesman for Sunshine Coast Business Council called for “the growth of the knowledge, creative, research and innovation, manufacturing and other such skills-based industries will create a larger total economic base that is better positioned for the region’s social and economic future” in place of “reliance on the mainstays of tourism, retail and property development industries.”

    A serious omission,of course, was agriculture. At least it is a step in the right direction. This is unsurprisingly being resisted by the developers who are, for their part, determined to cram as many people as possible into SEQ without any regard for food security or other measures of sustainablility in the region.

    For further information, see Curbing growth ‘would cost jobs’ by Jane Gardner in the Sunshine Coast Daily News of 25 April 2008, Sunshine Coast plan to cap population on Radio National’s PM of 24 April 2008 and How to end the Queensland economy’s addiction to population growth?.

  29. wbb
    April 27th, 2008 at 16:31 | #29

    According to the list below climate is playing a certain role in wheat shortages as JQ says.

    1. Canadian planting down 17 percent, the smallest crop since 1970, exports off 22 percent, hot/dry weather has affected yields.

    2. World ending stocks drop to 30-year low; export origin holdings down 40 percent.

    3. Australia stocks low, 2008 crop looking good.

    4. Argentine wheat crop is fully committed, government may restrict exports.

    5. Heavy rains deteriorate Western European crop quality, EU export taxes discussed.

    6. Drought hits Eastern Europe and Ukraine crops, weather damage in Russia, low stocks, export restrictions imposed.

    7. North African drought, Morocco crop down 76 percent, imports double to 3 million metric tons.

    8. Ocean freight transportation rates at record highs.

    9. U.S. winter wheat crop missed production expectations.

    10. Corn/wheat price spread at record level.

    Ref

    Nevertheless according to the “largest farmer” in the world, Nurlan Tleubayev, world wheat production has been stable for the last 15 years.

    Demand, however, has not been stable.

  30. Ian Gould
    April 27th, 2008 at 17:53 | #30

    The increase in total US corn production since 2006 has almost exactly matched the increase in corn consumption for ethanol production – meaning ethanol production has had virtually no impact on the amount of corn available for other uses.

    http://www.insidefutures.com/article/57008/USDA%E2%80%99s%20Baseline%20Projections%20of%20U.S.%20Corn,%20Soybeans,%20&%20Wheat.html

  31. wizofaus
    April 28th, 2008 at 07:16 | #31

    Actually Ian, that’s understating it…between 2006/7 and 2007/8, total production went up by 2539 million bushels, but usage for corn ethanol went up by only 1083 million bushels. On that basis, it’s hard to see what could driven the price of corn up so high (from $3/bu to $4) in that particular period. What would also be an interesting figure is how much land was switched from growing crops (of any sort) for food to growing crops for ethanol.

  32. Ian Gould
    April 28th, 2008 at 09:01 | #32

    Wiz, yes but to be as fair as possible I included the 3009 projection which shows a net reduction in corn available for other uses due to the continuing increase in corn use for ethanol.

    As for what drove the corn price – environmentalists have been saying for years that we’re really effectively eating oil. Take a look at what happened to the oil price over that period.

    Oh and let’s not forget the decline in the US dollar which makes US corn more attractive to foreign buyers.

    As I understand, the corn ethanol program was largely introduced to make up for the old set-aside program which was incompatible with WTO rules. The set-aside program paid farmers to leave fields fallow so at least some of the additional acreage used for corn probablt came from that.

  33. wizofaus
    April 28th, 2008 at 10:16 | #33

    Hmm…I’m not convinced even a 50% increase in the rise in the price of oil can explain much of a 31% rise in the price of a crop like corn – indeed, non-land costs for corn only increased by about 7% in that period, at least in Illinois: http://www.agriview.com/articles/2007/11/21/crop_news/crops02.txt. In particular, the increase in the cost of diesel fuel has had neglible impact.

  34. May 1st, 2008 at 13:01 | #34

    Howard’s old mate from Manildra is back in the news: Team Rudd is reviewing the ethanol subsidy.

    http://www.theaustralian.news.com.au/story/0,25197,23625837-5013871,00.html

  35. May 1st, 2008 at 13:13 | #35

    And the retail traders association has finally admitted there is a duopoly at work in this country!

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