Is Food Demand Growth in Asia a Myth?

Jayati Ghosh has long detailed piece over at the Guardian's Poverty Matters Blog about world food prices. She argues forcefully that demand growth from China and India are not a driving force in rising food prices.  Instead, she says, it's all about ethanol subsidies and speculation.

Ghosh presents a lot of convincing-sounding statistics.  I think I've got a reasonably good feel for the data and what she presents does, I fear, gently mislead the reader.  I don't disagree with everything she's saying but she's definitely overstating her case.

However, she does have me scratching my head to figure out the best way to put the various factors into clearer perspective.  That's something I'll work on.

For now, a few key points:

1) Consumption does not equal demand.  Demand is the whole schedule of consumption quantities across a whole range of prices, and holding all else the same.  What's ominous is that Asian consumption is growing fairly fast despite rising prices and slowing population growth.  That reflects increasing demand for American-like diets rich in animal products and processed foods (especially in China).  That increasing demand is not going to slow down unless Asia's economic growth slows down, and I don't want that any more than I expect Ghosh does.

2) Ghosh discusses coarse grains but omits oil seed.  The elephant in the room--which is closely connected to coarse grain markets--is soybeans.  Soybean production is a big source of growth in staple food production and Asia is sucking it up, big time.

3) Yes, ethanol is a big deal.  But that doesn't mean income growth in Asia isn't a big factor too.

4) Speculation has nothing to do with it.  If speculation were a driving force, we would see inventory declines.  Speculation can only cause prices to spike if it also causes inventories to accumulate.  So whatever the contributions of the various factors, they are fundamental, not speculative.  I've beat this horse many times, as have others who really know their stuff (Paul Krugman, Jim Hamilton at UCSD, Brian Wright at UC Berkeley, immediately come to mind).

I'm a bit concerned about they way Ghosh presents her data on consumption growth. First, by aggregating across decades and countries consumption is mostly inseparable from production.  She shows growth rates for each in a series of decades, and the trend looks downward.  That's basically because production growth has been approximately linear, so growth rates have declined as the baseline level production (the denominator) has grown larger.  What's ominous is that bit of an increase in the recent decade:  that's not production picking up but inventories getting drawn down, hence the price spike.

One thing I find a little strange is an apparent defensiveness on the part of some Asians about Asian demand growth.  I, for one, don't blame them for their growth.  Rather, I'm concerned that other poor nations (especially some African countries) are not growing as fast, and that many even in relatively rich and relatively growing countries seem to be left behind.  We should worry about income inequality, especially in an environment with high and rising prices of food staples.