biofuels leading to food shortages

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Food and the spectre of Malthus

By Mark Thirlwell

Published: February 26 2008 17:53

February has been the month for revisiting old and unpleasant economic concepts. Last week, financial markets experienced that 1970s feeling, as a combination of rising inflation and unemployment in the US triggered unwelcome memories of the decade of stagflation that ended the postwar golden age and the Keynesian consensus. Then came this week’s report that the United Nations’ world food programme might have to ration food aid. Set against a backdrop of rising food prices worldwide – global food prices have now risen by more than 75 per cent since their lows of 2000, jumping more than 20 per cent in 2007 alone – the news revived fears from a much earlier era, conjuring up the Reverend Thomas Malthus.
Soaring food prices have also revived some more contemporary worries. When China’s annual inflation rate spiked to an 11-year high in January on the back of an 18 per cent increase in food prices, China-watchers found themselves casting their minds back to the food price rises of 1988 and the social disturbances, protests and civil unrest that followed. Inflation is often cited as one of the factors behind the major demonstrations in 1989.
This rise in prices is a consequence of both demand and supply trends. On the demand side, the key factor has been the strong consumption growth in emerging markets, which in turn has been powered by those countries’ impressive income gains. China, for example, has accounted for up to 40 per cent of the increase in global consumption of soyabeans and meat over the past decade. At the same time, a series of supply-side disruptions in key commodity markets ranging from drought to disease have been at work.
Perhaps the most important drivers of price gains over the past year are developments in world energy markets. High oil prices have encouraged a policy focus on biofuels, including lashings of generous financial support. Production has responded quickly to these incentives: the World Bank reports that the US has used 20 per cent of its maize production for biofuels and the European Union 68 per cent of its vegetable oil production. This change in usage has boosted prices, reduced the supply of these crops available for food and encouraged the substitution of other agricultural land from food to biofuel production.
This is not the first time in modern economic history that the Malthusian spectre of global food shortages has stalked the world economy. Surges in food prices in the 1970s and then again in the mid-1990s both prompted warnings that agricultural capacity was failing to keep pace with a growing world population. Each time, the prices jumped it proved to be temporary as supply responded. There are good reasons for believing that this latest bout of market disequilibrium will ultimately reach the same resolution. That said, however, there are two important caveats to set against such an optimistic reading of current circumstances.
First, the lag in supply response to the stimulus provided by higher prices may prove to be of greater duration than its predecessors, to the extent that the current changes in world energy markets – and hence the associated demand for biofuels – are likely to be lasting ones. With climate change and environmental degradation threatening agricultural capacity in several key regions, the elasticity of past supply responses may prove to be a poor guide to the future.
Second, during the extended period in which supply continues to lag behind demand there are likely to be significant social and economic costs. Three in particular stand out.
Most important, a period of protracted higher food prices will be bad news for many of the world’s poorest people and its poorest economies. While the share of food in the consumption basket of a rich country such as the US is relatively low, at about 10 per cent, it averages about 30 per cent in China and more than 60 per cent in sub-Saharan Africa. Those countries that are most vulnerable are the low-income net food importers. Higher food prices add more strain to import bills that have often already been stretched by higher energy prices. Several of the poorest economies fall into this category and are heavily dependent on food aid to meet their needs. But the worldwide volume of such aid has stagnated for the past two decades and, what is worse, the quantity of aid delivered tends to fall as prices rise, given that a large proportion comprises a fixed annual dollar amount.
Next, there are important social strains to be managed. These may be particularly problematic for those emerging markets that are already struggling to deal with the consequences of growing inequality. Granted, higher food prices are something of a two-edged sword here, since higher agricultural earnings could reduce rural-urban income disparities. But the big losers are likely to be the urban poor, typically a politically volatile group, while many of the rural poor will also suffer.
Finally, higher food prices will call for tighter monetary policy. Given the disparity in the share of food in consumption baskets, and the fact that rich country central banks tend to exclude food prices from their core inflation measures, the policy reaction will tend to be greater in developing economies. Authorities may also be tempted by price controls and other direct measures. However, rich country central banks will also have to keep a close watch on any spillover effects that tighter monetary policy could have on non-food prices.
The writer is director of the international economy
programme at the Lowy Institute for International
Policy in Sydney
Copyright The Financial Times Limited 2008