Rising food prices

With grain and soybean prices reaching levels not seen since 2014, I expect that the media will soon be writing about global food shortages. There will be accompanying calls for governments to intervene to cap domestic food prices. There will also be calls to control the markets and ‘punish’ speculators.

Last week already, a group of scientists warned that the world was ‘facing a ghastly future of mass extinction’ and that the continued growth in world population is driving soil degradation and biodiversity loss. The scientists included Prof Paul Ehrlich from Stanford University, author of The Population Bomb, published in 1968. In that book, Prof Ehrlich warned that the population explosion would lead to hundreds of millions of people starving to death (in the 1970s).

In an interview in 2018, Prof Ehrlich commented that although ‘details and timings of his predictions were wrong, his book was correct overall’. He said: ‘Population growth, along with over-consumption per capita, is driving civilisation over the edge: billions of people are now hungry, or micronutrient malnourished, and climate disruption is killing people.’ He still believes that the world will run out of food and that millions will starve.

He is not the first to think this. In 1798, the English clergyman Reverend Robert Malthus wrote his famous Essay on the Principle of Population in which he predicted that the world’s population would be checked by famine. Malthus argued that the world’s food supply grew arithmetically, while the world’s population grew geometrically.  He wrote: ‘The power of population is indefinitely greater than the power in the earth to produce subsistence for man.’

Malthus believed that God had made it that way to teach humanity ‘virtuous’ behaviour. He believed that humankind should lead a subsistence life, and he predicted a future of ‘misery and vice’.

When Malthus wrote his essay, there were about one billion of us humans on our planet. Since then, the world population has increased more than eight-fold. Agricultural production has more than kept pace, so much so that the world is now struggling with obesity, not starvation.

Population growth is not currently driving grain prices higher. Rather, it is a mixture of bad weather, poor crops, well-intentioned, but inappropriate, government intervention, and a rush of imports into China as the country rebuilds both its stocks and its pig herd. To that heady mix, you have to add financial factors: inflation fears and a weakening dollar.

Nor will population growth drive grain prices higher in the future. The growth in agricultural production – largely through yield increases – continues to outpace population growth. This correlation contains an important causality: the growth in agricultural yields has permitted the growth in world population. There is no reason why this should suddenly change.

But what about temporary shortages – how can we deal with them?

The growth in yields over the past seventy years has led to such a huge increase in agricultural production that roughly 40 per cent of US corn production – and 50 per cent of European rapeseed production – is now used to fuel cars rather than humans.

Could crops currently used for fuel be diverted back to food in times of high food prices? This already happens on a huge scale with sugar in Brazil. When sugar shortages develop and sugar prices rise, millers produce more sugar and less ethanol.  Western countries have even less flexibility in corn or rapeseed, largely because of government-set ethanol and biodiesel mandates.

Not only has agricultural production increased enough to feed the population and fuel our cars, but it has also allowed us to eat more meat. A staggering 98 per cent of the world’s soybean production – and 36 per cent of US corn production – is fed to animals to produce meat and dairy. Animals are rather inefficient in converting grain and beans into meat. It takes 25 kg of feed for a cow to produce one kilo of edible meat and it takes 15 kg of feed for a sheep to produce one kg of lamb. (The figures for pork and chicken are 6.4 kg and 3.3 kg respectively.)

Could some of that animal feed be diverted back to direct human consumption? In theory, yes. In practice, it would take a large increase in meat prices to reduce meat consumption, and then only with a relatively long time lag. It wouldn’t happen quick enough to solve a temporary grain shortage.

Increased agricultural production and low food prices have also encouraged waste. It is often said that 30 per cent of food is wasted. Waste occurs in developing countries through unharvested crops, poor storage and a lack of refrigeration. Food waste in rich countries occurs in supermarkets, restaurants, and the kitchen. I am not sure that 30 per cent figure is correct, but even if it is, it is doubtful that much can be done about it in the short to medium term.

All this means that the short-term solution to high grain prices lies on the supply side. High prices will encourage farmers to plant more for the next season while at the same time encourage the whole supply chain – from the farm silo to the supermarket – to draw down stocks.

Modern-day markets have become so efficient that prices now rise in advance of shortages. Futures markets trade the future; they solve the problem before it occurs. Anything that interferes with – or delays – these price signals (such as government intervention) will in the end only makes matters worse.

© Commodity Conversations ®

This is part of a series of ‘long reads’ called ‘Why food doesn’t have to cost the earth’.