Whatever happened to the food crisis?
Jul 2nd 2009
From The Economist print edition
It crept back
Still Pictures
MULUALEM TEGEGN bought a donkey last year. As a hard-working Ethiopian farmer, aged 58, he saw the purchase of the beast as a return to better times after several seasons in which drought and high prices had forced him to sell his livestock and take his grandchildren out of school to work on the farm. This year, he will have enough grain left to buy a goat or two, and the donkey will help the children make the long trek again to school. This is how things are supposed to be.
World food prices soared in 2007-08, pushing hundreds of millions into poverty. But—said people at the time—there was a silver lining: high prices would be good for farmers, especially smallholders in poor countries such as Mr Tegegn. Higher returns would suck money into farming, leading to higher yields, bigger harvests and stable or falling food prices. Eventually, the argument ran, farmers and consumers would all be better off.
This happy state of affairs seemed to be coming to pass in the second half of 2008. Ethiopia reported a record cereals harvest this January, up 10% on the previous year. Across the world, the picture was similar. After the price spike in the first half of 2008, farmers harvested 2.3 billion tonnes of cereals in 2008/09, the biggest crop ever seen. Big exporters began lifting the trade bans they had imposed to keep local prices from rising, so more food became available to world markets. The sharp fall in the price of oil, which occurred at the same time, increased food supplies further because, by making oil cheaper than ethanol, it encouraged farmers to sell for feed the maize they would otherwise have turned into biofuels. As food supplies surged (and demand, hit by the global recession, stagnated), prices plummeted. Between its peak in July and a trough in December 2008, The Economist’s index of food prices fell by 40%.
All that seems fairly rational and hopeful. But this year’s changes have been more puzzling. Between December and mid-June, the food index rebounded by a third, even though this year’s total cereals crop is expected to be another bumper (2.2 billion tonnes, says the Food and Agriculture Organisation, second only to 2008/09, see chart below). Meanwhile, soyabean and sugar prices have risen by nearly half from trough to peak—see chart further below—and the index of “non-food agriculturals” (plants such as cotton or rubber) also rose by a quarter between December and mid-June. Prices have been increasing at a time of plenty.
It’s not meant to go this way
If this was happening during a boom, it might be understandable. But recession would normally dampen down price rises. So what explains the return of food-price inflation? And does it mean that the so-called world food crisis is returning?
There are two clusters of explanation: cyclical factors—features of the farm cycle and world economy that fluctuate from season to season—and secular, long-term factors. Cyclical influences include re-stocking: cereal stocks were run down as prices spiked and need to be replenished. In 2006 and 2007, stocks fell below 450m tonnes, about 20% of consumption; now they are back up over 520m, or 23%. That is one source of new demand. Another comes from ethanol. As oil prices rise, ethanol starts to be competitive again (as a rule of thumb, ethanol is profitable when petrol costs $3 a gallon in America, a level it has just reached in California). The fall in the dollar and in freight rates has also kept the local-currency costs of importing a tonne of cereals lower than dollar-denominated world prices. This has encouraged many countries to buy more.
Lastly, it is possible that the widespread hunger brought about by soaring prices—the FAO says a billion people will go hungry this year—may have reached a peak and the poor may be back in the market for grain again. This may sound unlikely, as traditionally poor consumers have had little influence over world food prices, but economic growth has continued in the largest emerging markets (notably China and India) and governments in much of the developing world have been expanding aid programmes for the poor, such as conditional cash-transfer schemes. That may be boosting demand; it would explain why prices of grain, which everyone eats, have been rising this year while prices of meat—the food of the rich and aspiring middle classes—have continued to fall.
Snakes in the grass
But the world food crisis of 2007-08 showed that food prices are not influenced solely, or even mainly, by cyclical factors. They soared in large part because of slow, irreversible trends: population growth; urbanisation; shifting appetites from grain to meat in developing countries. There is no sign that these trends are abating.
At the moment, the world’s population is 6.7 billion and 750m people are born each year. Though the rate of increase is declining, inertia means the total will go on rising until 2050, when the population will reach 9 billion. In Ethiopia, for example, 18m children are born every year, rising to 24m a year by 2040. That will double its headcount from 80m to 160m.
The FAO reckons that, to keep pace, the amount of food available in developing countries will have to double by 2050, equivalent to a 70% rise in world food production. If that does not happen, fears Joachim von Braun, the head of the International Food Policy Research Institute in Washington, DC, there could be a return to the food conflicts of 2007-08 which caused riots in more than 60 countries and set off a controversial worldwide land grab—a rush by rich food-importers to buy swathes of Africa and South-East Asia on which to grow food. Even if the rise in output comes about but in the “wrong” way, there could be problems, since water in some areas is growing scarce and increasing food output will make it scarcer.
The right way, argues Alexander Mueller of the FAO, is for farmers in poor countries to boost their yields. This would be better for the countries themselves, since it would make them richer. And it would be better for the world, too, because the potential for higher yields should be greatest where they are now low, especially in Africa. At the moment, cereal yields in Africa are around one tonne per hectare, compared with three-to-four tonnes in Europe and rich Asia. It should be easier to get an extra tonne per hectare by increasing African yields to two tonnes a hectare than by boosting already-fecund European or north-east Asian yields even further (water is more abundant in parts of Africa, too). Hence the hope that high prices in 2007-08 would goad farmers in poor countries to respond by increasing yields. Alas, there is little sign of that happening so far.
Losing out both ways
Almost all the increase in cereals output in 2008 came from rich countries: the harvest in those nations increased 11%. In developing countries, the rise was a mere 1%; if you exclude China, India and Brazil, grain output in poor countries actually fell. So while the costs of the food crisis bore heavily upon the poor, the benefits accrued more to farmers in industrialised countries. And nowhere were there signs that yields (output per acre) were rising. Harvests increased because farmers took more land under the plough.
The European Union shelved a programme that had obliged farmers to leave 10% of their land fallow; China scrapped a scheme that had allowed marginal arable to return to woodland. Both these actions boosted the amount of farmland. This was not bad in itself, and it was the quickest way to boost output. But it is only a first step. World food production cannot be increased by 70% just by increasing acreage: there is simply not enough unused land to go around.
The failure of farmers in poor countries to respond to price signals does not mean they are deaf to them. Rather the signals they get are often scrambled or muted. Farmers were frequently not paid the full world price for their crops, because governments were determined to keep local prices low in order to relieve hard-pressed consumers. Some governments also banned food exports.
Even in rich countries, farmers are responding to many things other than food markets. Take oil prices, for example: these (and government subsidies) determine how much maize is planted for ethanol. That in turn influences how much land is planted to soyabeans, which for American farmers are interchangeable with maize. Growers are also responding to the flow of investment capital into farming as a result of the global financial meltdown. Food is recession-resistant, and farming has been one of the sectors least affected by the worldwide slump. The FAO’s Abdolreza Abbassian argues that increasing links between farming and other parts of the economy are making it more difficult for farmers to calculate in advance the profitability of any one crop, so the area they plant is tending to fluctuate more sharply from year to year. Farming—as the past two years have clearly demonstrated—is becoming a more volatile business, both in terms of price and area planted.
On the face of things, markets last year were adjusting exactly as economic theory predicts they should: prices rose, drawing investment into farms; supplies then rose sharply, pushing prices down. But that was not the whole story. The price fluctuations of 2007-09 suggested that uncertainty in the world of agriculture was deepening under the influence both of oil prices and capital flows. The fact that prices are still well above their 2006 average, even in a recession, suggests that the spike of 2008 did not signal a mere bubble—but rather, a genuine mismatch of supply and demand. And this year’s price increase suggests that there is a long way to go before that underlying mismatch is eventually addressed. “I don’t see that anything has fundamentally changed,” says Mr Abbassian. “That means we cannot go back to where we were in 2007.”
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