October 28, 2007
Rising Food Prices
Rising Food Prices and What That Means-Becker
Malthus and the many neo-Malthusians of modern times assume that the threat from world overpopulation would show up first in rising food prices. The biologist Paul Ehrlich even predicted in 1968 in the book "The Population Bomb" that hundreds of millions persons in the world would be starving by the mid-1970's because of food shortages. Of course, that absurd forecast never materialized because during the past 40 years worldwide prices for grains and most other basic foods fell relative to non-food consumer prices. This has reversed during the past couple of years, especially in 2007, as food price inflation has greatly exceeded the price increases of other consumer prices. Are the Malthusian fears finally being realized, or is this rise in food prices due to other forces?
Little evidence supports the role of population growth as an important factor behind the recent spurt in food prices since the growth in world population has slowed in each subsequent decade during the past 30 years. A more significant force behind the rise in food prices is the rapid growth in the per capita incomes of developing countries, especially China and India, which has raised world demand for proteins found in grains, dairy, and meat. Subsidies to corn and other crops to produce biofuels have also reallocated substantial acreage away from food production, and toward the production of substitutes for oil and other fossil fuels. Ethanol production will consume almost 30 percent of corn production in the United States next year, which mainly explains the rapid rise in world corn prices. In addition, droughts and animal disease in major food producers like Australia and China contributed also to recent food price increases.
Many countries were panicked by the sharp rise in food prices during the past couple of years into imposing price controls on basic foods, export restrictions on food production, subsidies to food imports, and various other measures. This is reminiscent of Richard Nixon's 1973 ban on the export of soybeans from the United States because of rising soybean and other food prices. Russia, faced with parliamentary elections in December, has imposed export duties on some grains, while Putin pressured major food retailers to freeze prices on various foods until the election. The Moroccan government forced bakers there to hold the price of bread steady during the holy month of Ramadan. The European Union has suspended, unfortunately not rescinded, its rules that prevent farmers from planting cereals on a specified fraction of their land. Many other countries are also considering controls, subsidies, and regulations to prevent food prices from rising so rapidly.
Most of these policies are counterproductive because they discourage rather than encourage food production. This is especially true of price controls since farmers will grow less of the foods that have artificially low price ceilings. For example, if price controls were placed on wheat, farmers will shift some land from wheat to other products whose prices are allowed to rise faster. Subsides to food production generally lead to greater supplies of food, but at the expense of distorting the allocation of resources between foods and other goods that consumers want. On the other hand, removing tariffs on food imports, removing subsidies on food exports, and easing restrictions on how farmers can allocate their land among different uses do contribute to greater efficiency in worldwide food production and consumption.
Food prices declined relative to other prices during the past 40 years, and in fact for most of the 20th century, because of remarkable advances in food production technologies. These include the development of better fertilizers, new crop rotation methods, control of diseases to plants and animals, better breeding techniques, genetic modifications of crops, and other innovations. There is little reason to expect any slowdown in the rate of innovation during the next several decades, especially if governments reduce their restrictions on genetically modified crops, and if farmers are allowed to respond freely to market prices and other signals.
Rapid increases in the cost of foods hurt consumers in poorer countries more than those in richer countries because households in poorer countries spend a much bigger fraction of their incomes on food. Food accounts for about 10 percent of total consumer sending in the United States and other rich countries compared to over 60 per cent in very poor countries like Afghanistan, Nigeria, and Bangladesh. This means that say a thirty percent rise in food prices over a 5 year period, with other prices and money incomes held fixed, would reduce the standard of living in rich nations only by about 3 per cent, but it would lower living standards in poor nations by 21 per cent. The nutrition of Afghanis and consumers in other poor countries who are already close to the minimal subsistence margin would be severely affected.
Similarly, poorer consumers within a country spend larger fractions of their budgets on food than do rich consumers. Hence, the poor would be hurt more by rises in prices of basic foods. This is a main reason why governments are so sensitive to price increases of grains and other stables of the poor. If they forget, political leaders would be reminded of the 1977 Egyptian riots after that government raised bread prices, or the Mexican unrest at the beginning of this year when the price of the flat corn bread used to make tortilla, a staple of the diets of poorer Mexican households, rose by several hundred percent.
My conclusion is that putting aside two major uncertainties, the Malthusian fears about rising food prices will not materialize. Food production will adapt to the growing demands from developing countries, and food prices in the future should continue their downward trend of the past century. One uncertainty that could upset this optimistic forecast relates to global warming, for food prices might rise steeply if global warming had sizable negative effects on the worldwide productivity of agricultural land. The second concerns biofuels, since food prices would also increase if sizable amounts of additional acreage continue to be diverted to production of ethanol and other biofuels in the attempt to cut down the use of fossil fuels.
Food Prices and Ethanol--Posner's Comment
Thomas Malthus, though like the rest of us not very good at predicting the future, was a brilliant economist. He was wrong that the human population would increase geometrically (he did not consider contraception as a means of voluntarily limiting population) and the supply of food only arithmetically (he did not foresee advances in the technology of food production). But he was right that achieving an equilibrium between population and food could require starvation, war, or other unattractive methods of limiting population. In this he foreshadowed natural selection, as Darwin acknowledged. Rising food prices are doubtless causing malnutrition and even starvation in some backward countries today, and if they continue to rise, more people will starve. Becker is correct that sensible policies can moderate the price increases, and perhaps restore the trend toward lower food prices, but who can be confident about the adoption of sensible policies?
An important factor in recent food price increases is the ethanol subsidies. Ethanol is a "clean fuel" in the sense that unlike gasoline its burning as a fuel does not produce the conventional pollutants, including carbon monoxide. It does produce carbon dioxide, the principal culprit in global warming, but this effect is said to be offset by the fact that the corn from which ethanol is manufactured absorbs carbon dioxide, as trees do. However, the manufacture of ethanol requires a great deal of energy (more energy, some critics believe, than the ethanol itself produces), and in China for example that energy is supplied mainly by coal-burning plants, a fertile generator of carbon dioxide. Moreover, deforestation by fire, common in the Third World, is increasing in order to provide more cropland for the production of ethanol, and deforestation by fire is a major source of atmospheric carbon dioxide.
So it is doubtful that ethanol is a significant part of the solution to the problem global warming--indeed it may be part of the problem--and in any event the subsidy is more often defended as an answer neither to conventional air pollution nor to global warming, but instead as a means toward making the United States self-sufficient in energy.
The federal subsidy alone is currently running at a level of $7 or $8 billion a year. There are state subsidies as well, and, more important than either type of direct subsidy, there are indirect subsidies in the form of legal requirements that gasoline producers purchase a specified amount of ethanol to mix in with their gasoline. A federal law enacted in 2005 doubled those requirements and is believed to have been a big factor in the ethanol boom and resulting recent increase in corn prices.
Ethanol could be bought cheaply from Brazil, but high tariffs prevent the Brazilian and other foreign producers from competing with our farmers and producers. We could not achieve energy self-sufficiency from our own production of ethanol. Even if all the corn produced in the United States were used to produce ethanol, which is unthinkable, the amount of gasoline consumed would fall by only 12 percent. (This is a little misleading; an enormous increase in the demand for ethanol would lead to more cropland being switched to corn from other crops. But that could result in much higher food prices.) Moreover, the amount of other fossil fuels consumed would rise because of the energy requirements for the production of ethanol.
We could as I said increase the percentage of our total fuel consumption that is supplied by ethanol by buying ethanol from abroad, and while that would make us dependent on other countries for an important part of our fuel supply, it would not be dependence on other oil-producing countries. That would be a benefit. Because of the instability of many of those countries (such as Iraq and Nigeria), and the hostility to the United States of some of them (such as Iran and Venezuela), there would be value in achieving energy independence, or at least a good deal more independence than we have today. But we cannot achieve it through the ethanol subsidy. We can achieve it (at least insofar as ethanol can contribution to the solution) only by relaxing the tariff on imported ethanol. But this sensible measure seems blocked by one of the absurdities of our political system--the Iowa caucuses, which extract pledges from all plausible presidential candidates to preserve and indeed expand our home-grown ethanol industry--and, more broadly, by the excessive influence of our tiny farm population on U.S. policy. As a result of these factors, ethanol subsidies are bipartisan.
Most ethanol is manufactured from corn. The United States is the world's largest exporter of grains, and exports of our corn account for one-fourth of total worldwide grain exports. As a result of the increasing diversion of U.S. corn to the production of ethanol, food prices in the United States and the world have soared. It is estimated that by the end of this year, food prices in the United States will have grown in real terms by almost 5 percent (a 7.5 percent nominal increase in price minus a 2.6 percent inflation rate).
Technology is more likely to bail us out before our political system does. What is called cellulosic, as distinct from corn, ethanol--the production of ethanol from a variety of plants, other than corn--holds promise for enabling ethanol to be produced without forcing up the price of corn, but is not yet commercially feasible.