November 21, 2010
Global Food Prices
Global Food Prices—Posner
The increase in food prices in recent years has been dramatic. World food prices roughly doubled between 2004 and 2008, then declined sharply as a consequence of the global economic crisis and now is rising rapidly again and may soon reach or even exceed its 2008 peak.
The price of a commodity will rise if demand increases in the face of an upward-sloping supply curve (unit cost increasing with amount produced) or if, with demand unchanged, the supply curve shifts upward, or if both changes occur. (There are other conditions, such as cartelization, that can drive up prices, but I'll ignore them.) The supply curve of food is upward sloping, and demand for food has been increasing because of increases in population and in income in poor countries (with higher incomes, people eat more and also eat more costly food, such as meat as compared to bread or potatoes), and also because of demand for biofuels, such as ethanol, that often are manufactured from crops. The increase in demand moves output out along the supply curve, increasing cost and therefore price. In addition, the supply curve itself has been moving upward because of the increased price of oil (a major input into fertilizer and into the operation of farm machinery and transportation of agricultural output to processing plants and markets) and the output-restricting measures taken by Russia and China recently, discussed by Becker.
The increased food prices are calamitous for very poor countries, and for poor people in other countries (in the absence of subsidy, such as the U.S. food-stamp program), but the world as a whole can take them in stride because they are self-correcting. High prices reduce demand and thus move output down the supply curve, resulting in a new, lower-price equilibrium.
High food prices might even be considered a good thing from the standpoint of overall global economic efficiency. Farmers are a small minority in wealthy countries such as the United States and France, but the small size of the agricultural sector actually augments its political power, because a compact interest group can enrich its members by obtaining protective legislation that raises the costs of the rest of the population by only a small fraction. The result is widespread restrictions on food imports that reduce agricultural output in countries that produce agricultural products for export. A notable restriction is the U.S. tariff on ethanol produced by Brazil, which manufactures ethanol from waste agricultural byproducts, such as cornstalks, rather than, as the U.S. does, from a valuable crop—corn.
The "green revolution" greatly expanded agricultural production and caused farm prices to fall. Whether there will be comparable innovations in the years ahead cannot be predicted with any confidence, but they seem unlikely to offset negative factors, which are numerous. Global warming will increase droughts and interfere with irrigation. Glaciers are melting rapidly, which causes flooding (as recently in Pakistan) but decreases the amount of water in rivers or lakes. The reason for that decrease is that while glacier evaporation increases rainfall, rainfall does not significantly increase the amount of water in rivers or lakes, which are major sources for irrigation both natural and artificial, because rain falls randomly; in contrast, normal glacier melting feeds rivers and lakes directly. There is in fact a worldwide water shortage; it can be alleviated by a variety of means, but most of them are costly, such as desalination.
World population and incomes can be expected to grow for a number of years; so, as agricultural output moves out along a rising supply curve, agricultural prices may continue to rise steeply for many years, with, eventually, calamitous consequences in poor countries. And agriculture is increasingly vulnerable to blight because there is less agricultural diversity; farmers the world over use the same ("best") seeds for each crop, reducing genetic diversity and so increasing the vulnerability of crops to disease.
The most promising technological innovations in agriculture involve genetic modification of crop seeds. Limitations on the consumption of genetically modified crops may seem an example of legal measures intended for the protection of domestic agricultural production. Certainly that is a motive and certainly the concern that eating genetically modified crops is dangerous to one's health is spurious. Nevertheless such crops pose potentially serious environmental dangers. They are engineered to be like weeds—hardier than natural vegetation—and we all know what weeds can do to the vegetation they come into contact with. Genetically modified crops thus may destroy large areas of natural vegetation. Moreover, simply expanding the area of the earth's surface that is under cultivation is likely to cause deforestation, which is environmentally harmful. Moreover, as less fertile or accessible land is brought under cultivation, the marginal cost of food production rises.
The combination of rising population and incomes, stimulating demand, and increased costs of agricultural supply, spells continued steep increases in food prices. (Some of the costs are external, however, and hence do not directly affect food prices.) The tendency may be reinforced by the kind of inefficient responses to high food prices that we are witnessing in Russia and China. At some point increases in food prices may induce reform measures that would moderate the increase, such as elimination of tariff barriers. And even before that, rising food prices may induce private adjustments, such as lower birthrates and less meat consumption, that reduce the demand for and the cost of food, and hence food prices.
Of course the future is uncertain, and food prices famously volatile. Nevertheless the probability of continued increases in food prices cannot be reckoned slight.
Public Policies and Rising World Food Prices Once Again-Becker
From 2002 to 2008 the prices of many foods, including corn, wheat, and rice, increased by a lot. For example, The World Bank's index of food prices increased by over 100% from 2002-2008. Grains and other food prices fell rather sharply during the financial crisis, along with the fall in oil prices and those of other commodities. But food prices are rising once again. The UN's Food and Agriculture Organization indicated that its food index rose in October to levels last seen during the peak in 2008.
Food prices are marching up again mainly because the world economy is recovering from the crisis. Fast growing economies like China are increasing their demand for wheat, meats (animals use lots of grain as animal feed) and other foods that were formerly out of reach of the typical family in these economies. Reactions to the food price increases include Russia's and Ukraine's banning of wheat and some other grain exports "temporarily", and China's threat this past week to impose price controls on various foods, such as ginger and garlic, that are important in the Chinese diet, and have been rising rapidly in price.
A little basic economics is useful in evaluating these and other proposals. The world price of grains essentially equates the world supply and demand for grains. An increase in world demand for cereals and other foods- perhaps because of economic development in poorer nations that raises the average family's demand for wheat, corn, and meat- would increase both the prices of grains and the quantities produced and consumed. An increase in world supply-due perhaps to good weather in grain growing regions, or to greater agricultural efficiency, such as through the development of genetically modified foods- would also increase world consumption of grains, but supply increases would lower world grain prices.
A further complicating factor is the growing use of corn and cane sugar to produce biofuels as substitutes for gasoline. In particular, the United States now unwisely devotes a sizable fraction of its corn output to biofuel production. So it is necessary in using the supply-demand framework to distinguish production of corn from its consumption as foods either by humans or animals. According to the USDA, ethanol production in the U.S. has increased from less than 3 billion gallons in 2003 to over 6 billion gallons in 2007, and is estimated to exceed 12 billion gallons in 2020. In 2008, about one quarter of US corn production was used to produce biofuels, and that share has been rising since then to almost 35%.
Most of the current proposals to combat increasing food prices are counterproductive, and would reduce efficiency. For example, Putin's banning of Russian exports of wheat supposedly only until the end of this year forces Russian farmers to sell all their wheat output in the domestic Russian market rather than to sell part in the world market. This lowers the price of wheat in Russia below the world price of wheat. This means that Russian wheat farmers get less for their wheat than if they exported some of it, and Russian consumers pay less since they have a greater supply of wheat available to them.
Such an outcome would be politically popular if urban consumers in Russia have greater political clout than Russian wheat farmers. However, Russia as a whole is made worse off by this ban since it gives up the higher prices from selling some of its wheat abroad. In addition, Russian farmers would plant less than the efficient amount of wheat because they would be getting a lower price of wheat than they could get in the world market. Russia would be better off if it allowed farmers access to world prices, and it could give income transfers to urban families that offset at least some of the resulting higher cost to them of wheat and other foods.
The price controls proposed by China on vegetables and other foods are if anything worse than Russia's ban on exports. These controls would keep down prices to consumers, which encourages their demand for the foods affected, compared to demand at what the prices would be if the forces of supply and demand were allowed to operate freely. At the same time, Chinese farmers would shift some acreage out of the price-controlled foods. The result would be an artificial "shortage" of ginger, garlic, cabbage, and other foods with controlled prices because of these responses to price controls by both consumers and producers.
Another set of bad policies are the restrictions that many countries, including but not limited to, the United States and other rich countries, impose on imports of foods from developing and other nations. These restrictions discourage greater food production in poorer countries, precisely the countries where food production is a major source of income. Import restrictions also cause a world misallocation of food production toward excessive levels in the EU, Japan, and the US, and insufficient production in Africa and other poor and developing nations.
The great advantage of prices in allocating resources is that they simultaneously give signals to both producers and consumers. Higher prices discourage consumption, and at the same time encourage greater production by profit-seeking farmers. To be sure, the demand for grains and other foods by consumers is not highly responsive to prices in the shorter run, although their degree of responsiveness grows as consumers have more time to adjust to higher prices. Similarly, supply is not so responsive to higher prices in the short run since farmers need time to make adjustments in planting, use of capital, and in various other production decisions.
In the long run, however, supply of food is very responsive to prices. Food is not like oil, natural gas, or copper, where supply is limited by the quantities of these resources in the ground or under water. Food production can be greatly increased with sufficient time by using more land to grow food, by greater use of fertilizers and capital to extract more output from a given amount of land, and by encouraging R&D on food output that would find new ways to increase productivity, such as happened with the "Green Revolution" and genetically modified foods.
For all these reasons it is reasonable to expect that the worldwide supply of food would be very responsive to food prices in the long run, as long as the forces of supply and demand were allowed to operate rather freely in the world market for foods.