Wednesday, January 12, 2011

Please Sir, I want some more

Onions in India. Cabbage & pork in South Korea. Chilli Peppers in Indonesia. Frighteningly, wheat globally. Riots have already started in Algeria , and is sure to spread. Food price inflation is hitting the world again. Millions of children will echo Oliver Twist's begging in those immortal words which are the title of this post. Are we going to see a repeat of 2008 ?

This blogger is no expert on food economics. But the issue of food prices is close to his heart and he has posted on the awfulness of food price inflation here before. All inflation is bad, but food price inflation is especially awful. For it ceases to be an economic problem of supply and demand and becomes an issue of survival for half the world's population. It sparks a humanitarian crisis. And it will inevitably lead to unrest and riots. The world cannot afford inflation in the price of food. Certainly not the high double digit inflation that it is seeing.

The issue is a complex one. World food supply and demand is in a precarious balance. In the short run, any disruptions in supply, usually due to natural calamities leads, to a massive spike in prices. This year the wheat crop has failed in Russia and Australia. But the issue of enhancing supply is a longer term one. The gains due to scientific revolutions in crop breeding, use of fertilisers, and the like has started to taper off. No new breakthrough is coming.

The use of large cultivable land to grow bio fuels, especially in the United States is another contributor to pressures in supply. Cultivable land is finite. Any use for other than food growing, will result in lower food supplies.

On the demand side, there has been an inexorable rise, which is actually a good thing. A chief cause has been the economic development of China and India. Higher levels of nutritional requirements are a happy result of economic development and has led to continuous increase in demand. The same will happen in Sub Saharan Africa.

A third cause for inflation is the price of oil. Oil prices affect not only in food transportation, but also in price of fertilisers. Oil is a key input cost in the growing of food. And we know where oil price is - last at $93 a barrel.

A fourth cause is awful government policies. Because agriculture is an emotive subject, every government under the sun has an unbelievable maze of subsidies, freebies, giveaways that completely distort the economics of food production and consumption. And the immediate reaction to even a perceived shortage is a banning of exports - Russian ban on wheat exports are a direct cause of the rise in wheat prices. India and Pakistan are playing silly games with banning onion exports.

I am afraid food prices are going to be high for the foreseeable future. This is an inevitable equilibrium point, I believe. With high prices, will hopefully come more investment, more capacity creation, technological breakthroughs, etc etc . In other products this will happen quicker. Agriculture, because it is heavily distorted by government action, will see this much much slower. But even after this, the price levels will remain higher. This has profound implications for the world's poor - even today, hunger is not because of lack of food. Its because of lack of affordability.

Like every opinionated commentator, this blogger has his points of view on what ought to be done. It is the intention that this subject will feature repeatedly over the coming weeks. Meanwhile I invite you to ponder over the problem and share your ideas. I believe this is one of the most pressing problem facing the world today.