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November 18, 2010 / passiveprogressive

The Gift that Keeps on Taking: the Recession and the Global Food Shortage

  • Investors have moved their money from unstable markets into new ones, such as food commodities.
  • That’s not good.

In this first post I wanted to discuss a phenomenon that has been in the periphery of my attention for the past few weeks: the increase in food prices.

I’m currently living in Rabat, Morocco, and many of my Moroccan friends have commented that items such as processed foods have gone through the roof in terms of cost. A recent trip to the nearby Label Vie cost me nearly $40 for basic items such as crackers, tortillas, and bread (there were certainly other items included though). In contrast however, the prices of the local vegetables in the market outside were strikingly low (bananas, peppers, onions, kiwis, and tomatoes for less than $7).

But such a subjective read on product prices makes for shoddy economic speculation, so I turned to the media for some answers as to why food prices have spiked.

An article in the Economist describes this event as the result of both the United States and Russia failing to supply the world with corn and grain, respectively. In both cases the shortfall was related to environmental factors, though this might not be a complete picture of the situation.

Notwithstanding, this is an embarrassingly generalized graph for the Economist. Among other things, it leaves out how much individual sectors of food production have increased, and leaves us speculating as to what has happened to food prices for the years before 1980. But perhaps the most serious flaw in this graph is that US CPI in known for being an excessive deflation mechanism, meaning that real prices could be significantly higher.

As we can see from the “food-price index” prices have climbed to nearly that of the food crisis in 2008.

The 2008 crisis, which caused food riots in nearly 30 countries, has now been understood as the result of too many government incentives towards ethanol production with US corn. A textbook supply and demand situation ensued: decreased supply led to higher prices for basic food staples.

But the 2010 shortage is different.

This is one of the first major food price spikes in recent history that has been investor and consumer related that occurred without government help.

In the case of consumers, price increases can be understood though Engle’s Law, which states that when a family’s wealth increases, the proportion of income spent on food goes down, though the real amount spent on food goes up. With family incomes on the rise in China, food prices have begun to adapt, causing inflation within the country.

But in addition, these families are looking for “higher quality” goods, such as meat and processed foods. Diets in meat and processed goods require an astronomical amount of grain, meaning that once a country passes the margin where it can afford these commodities, prices for all factor inputs will jump.

The main point to take away from all of this is that with countries developing and demanding higher quality food, the base price of factor inputs like grain and corn are likely to keep rising.

In the case of investors, news of forest fires in Russia and a poor US wheat crop lead to a spree of buying food commodities that will be – at least according to speculators – scarce.

But more interestingly, according to The Guardian, there has been an influx of new investors into the food commodity market. Food staples, such as grain or rice, are considered to be fairly conservative investments. And while gold may be topping out in terms of value (time to start short-selling) food commodities are still relatively low-priced. Many of these investment firms are still in the crisis mindset, and it’s quite possible that they see both increased demand and the potential of a mass collapse of the economy as guarantees of their investment’s value.

Final Word

In the wake (or perhaps the eye) of a financial crisis, a tremendous shift in the allocation of resources and who owns this is almost guaranteed to take place. However, with over a quarter of the world’s population living on less than a dollar a day, I have to question the wisdom of having a set of particularly jumpy speculators playing a large role in determining who gets to eat.

Looking forwards to the grand scheme of things, we will also have to overcome the malthusian dilemma of growth that is completely unsustainable. Nations such as China and India may bring this issue to the fore sooner than we expect.

In the meantime I’m going to enjoy the fact that I can make potato stir-fry with local produce for less then $4. The only speculation involved will be how not to burn my dinner.

Rice prices have remained stable, though maize and wheat prices have gone up after reports of poor crops this year.

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