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Spectre of Food Prices

Omkar Goswami

Everyone hates naysayers. Consider Thomas Robert Malthus. When he published An Essay on The Principle of Population with its scenario of long term food scarcity — unchecked population growing in geometric progression while food supply increasing arithmetically — Malthus was reviled as a hard-hearted prophet of doom and an enemy of the working class.

Fast forward 170-odd years to the Club of Rome’s 1972 best-seller, Limits to Growth, which modelled the consequences of a rapidly growing world population facing finite resource supplies. It was lambasted as "a piece of irresponsible nonsense", and repeatedly pooh-poohed by magazines such as The Economist as meaningless fear mongering. Indeed, until a few years ago, The Economist took the lead in treating global warming as unsubstantiated blather of bleeding-heart greenies.

Without being Malthusian, here’s a sobering hypothesis: “With high probability, the world will witness a fairly long cycle of food price inflation. There could be peaks and troughs; but prices will be trending up, with more rather than less inflation.”

Before explaining why, here are some facts from the World Bank. Between August 2007 and February 2008, low and middle income countries have seen:
• 28 per cent increase in the weighted price of all agricultural products.
• 38 per cent increase in the price of food.
• 49 per cent increase in the price of fats and oils.
• 51 per cent increase in the price of grain.

Over the same period, global price of coconut oil has risen by 54 per cent; groundnut oil by 42 per cent; soybean oil by 57 per cent; maize by 47 per cent; rice by 42 per cent; US wheat by 71 per cent; bananas by 55 per cent; and sugar by 38 per cent. The list is long.

Is this the beginning of a longer trend? While the sheer extent of the current food price inflation may be high, the trend is clearly one of hardening prices. There are good reasons why this is so, and why we can expect it to persist.

First, substantial growth in per capita income over the last 15 years, especially in China and India, as well as other sizeable low-to-middle income countries has led to growing demand for food. Moreover, rising incomes have led to disproportionate increase in demand for ‘better’ food — what economists call food ‘luxuries’ rather than ‘necessities’. It has taken varying forms in different countries. For instance, the Chinese spend more on sweets (cold drinks, confectionary) than before; they have also started consuming wheat in the form of bread and cakes; and their consumption of meat has gone up substantially. In 1993, only the top 15 per cent of India’s rural population spent more on milk, fruit, vegetables, eggs, fish and meat than on cereals and pulses. In 2004, this had risen to over 30 per cent.

In the case of China, rapidly growing demand for food ‘luxuries’ has translated to severely hardening prices. The price of foodstuff in January 2008 was 23 per cent higher than a year earlier. The price of meat and poultry surged by 45 per cent, of which pork rose by 63 per cent; that of fresh vegetable rose by 46 per cent; and oil and fat by 41 per cent.

Second, like it or not, agricultural productivity takes time to increase. In agriculturally advanced countries it can take up to a decade. In north India, where ground water was depleted alarmingly and the soil is leached, it will take longer. Till yields increase, the only way to raise global agricultural output is to grow the area under cultivation. To be sure, area under crops vary according to relative price movements. However, there are severe constraints to the total cultivable area — the more so if one takes long term environmental and forestation needs into account. Ask yourself this question: Where will the extra grain come from to feed more of the pigs that meet the burgeoning demand for Chinese pork? Hence, expect to see general conditions of excess demand.

Third, policy distortions have hurt supplies. Consider the subsidy-driven fetish for alternate bio-fuels, which is diverting sugarcane and maize to ethanol production. The more this happens, the less will be the available area under food.

Higher per capita incomes; greater demand for food; lower acceleration of agricultural productivity; limitations to cultivable area; and food-diverting subsidies. Why shouldn’t you expect hardening food prices in the future? Now think of its political consequences. That’s giving Dr. Singh and Mr. Chidambaram the heebie-jeebies.

 Published: Business Standard, March 2008


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