Debating Food Prices at the New York Times

We're live at the Room for Debate:
Bad weather is clearly influencing food commodity prices. So is demand growth, most notably from rapidly emerging economies like China, where people like grain-fed meat and dairy products as much as we do, and many now have incomes to afford them. Then there is the increased demand from subsidized and mandated ethanol production.

Price spikes like the current one can and will happen regardless of whether the climate has changed or will change. It is just the nature of these kinds of markets: bad weather shocks draw down inventories, which make prices higher and more volatile. A few good weather years could replenish inventories and bring prices back down.

Thankfully, rice prices haven’t spiked -- yet. Historically, market forces have caused spikes in rice prices to follow those of corn, soybeans and wheat. These four crops provide the caloric basis for most food worldwide.

Here in the U.S., we won’t notice high commodity prices in the price of food we buy at stores and restaurants. The price of our food is comprised mainly of the labor involved in processing, transporting and marketing. Indeed, this fact helps explain why commodity prices can increase so much so fast -- we’ll buy little less even if commodity prices double or triple from current levels.

High commodity prices matter mainly for the two billion or so living on $2 a day or less and spend the bulk of their income on food. Some of these people will buy less food as prices rise, because they simply won’t be able to afford as much. I wouldn't be surprised to see more civil conflict as more people go hungry.

Productivity growth will need to accelerate from historical trends to keep up with F.A.O.’s predictions for population and income growth. If it doesn’t, prices will trend higher, perhaps a lot higher.
Markets must be worried that the weather shocks we have recently experienced are not transitory, but rather tidings of more permanent and significant changes. Climate models predict that extreme weather events, like the ones recently experienced in Australia, Russia, the United States and China, and potentially much worse, will begin happening with greater frequency, and possibly much sooner than many people expect. Looking ahead, we need to start dealing more realistically with the risks posed by climate change.

The greatest hopes against truly catastrophic declines in crop production are a possible boost from CO2 fertilization and improved productivity through breeding or genetically modified crops. But there is increasing skepticism that these factors can compensate for the negative effects of a warmer climate and growing demand.

Trade restrictions remain pervasive and help to keep commodity prices high. Recent research by Jeffrey Reimer and Man Li indicates prices could fall by 57 percent if all countries were as open to trade as the United States. Particularly acute examples, like the recent ban of wheat exports by Russia, India’s rice export ban in 2008 and subsequent Philippine hoarding, can greatly exaggerate the effects of weather shocks on world prices. Such policies likely come about from efforts to keep food affordable for a country’s most disadvantaged. Their ultimate effect, however, is to keep food prices higher worldwide, and make more people hungry. To make matters worse, market speculators likely hold greater inventories in anticipation of possible future export bans or hoarding.

The best immediate response to these problems would be to reduce barriers to international agricultural trade, and to develop mechanisms to protect the world’s most vulnerable from inevitable price spikes. Such protections, if credible, might convince markets that crude market interferences like export bans were less likely, which would reduce speculative inventories and prices today
My piece was a lot longer than they requested, and they still kept nearly all of it with only minor and helpful edits.  The one key piece that was cut in editing was my dig at those tying to tie commodity price increases to monetary policy and fears of broader inflation.  One of the links makes that point, so I guess that's okay.

The first debater, Raj Patel, makes no sense to me whatsoever.  Knorr seems thin.  But I see little to disagree with from anyone else.

Update:   To the tireless inflation mongers out there:  Today is different than the 70s.  There's more than I have time to get into at the moment, but the two big differences are:

1) Commodity prices make up a much smaller share of our economy today than they did back in the 70s.  The one place to look at to see this is energy consumption expenditures as a share of the economy.  That's the big one, and it's still much smaller today.  Food commodities were trivial back then and are much smaller now.

2) Unemployment.  It's higher today than when prices spiked in the 70s while the natural rate is probably lower.  If you think wages are going up any time soon in this country you are smoking some really strange grass.  Without a wage-price spiral, we're not going to have inflation.

If you don't believe me, then by all means, go short on traditional treasuries and long on inflation-indexed treasuries, and if you're right and I'm wrong, wake up next year a very rich man or woman.

I think the market has this about right: historically low inflation for the next 5 years or so.  Which is too bad. I think a bump up in inflation to 3, 4 or 5 percent would do our economy a heck of a lot of good.

It's not about us.  Really.  It's about poorest 1-2 billion in the world, and those folks don't live in this country.

Comments

  1. I agree with your analysis here. But there was insufficient linking to ecological impacts, global population, side effects of trying to chemically grow our way out of this mess, let alone pollution and soil depletion.
    Timothy Barksdale
    Choteau, MT &
    Prairie Village, KS

    ReplyDelete
  2. I think you miss the epicenter of inflationary psychology. Chinese workers are demanding, and getting, wage increases to offset the higher cost of living. This is driving up labor costs for a whole host of manufactured items, and firms are passing it through to prices. To the extent that other countries benefit from a Chinese price umbrella, they are also raising prices.

    Further, commodities inflation can happen in the absence of continual supply shocks. All you need is inflationary psychology: producers, consumers and speculators will hoard and "buy forward" as they expect prices to rise, and given monetary accommodation, prices will rise. Any supply/demand approach to inflation that ignores hoarding and forward buying is incomplete.

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  3. BTW, we have never had a Philly Fed Future Prices Paid reading above 70 without the Fed ALREADY having initiated a tightening campaign. Today's reading indicates broad expectations of future input price increases -- not just commodities. Given those expectations, firms are likely to pull forward input purchases and inventory them. This behavior is the essence of inflationary psychology.

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  4. Sorry -- I meant to say "never had a reading above 70" with the exception of the 70's, when, of course, we had high inflation as a result.

    ReplyDelete
  5. Last year's crop was one of the highest on record. Many commodities have doubled in price in 6 months yet the reason we are given is due to poor supply?

    Demand for food is increasing in developing countries but the two most likely foods to go up (rice and meat) remain at their usual annual levels. (FAO) Again this answer leaves me with an unsatisfied feeling.

    Prediction can be such a messy business so why are some parts of the puzzle dismissed out of hand?

    Colin

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  6. Colin:

    Which parts of the puzzle have I dismissed? In 600 words or so, I think I hit the major points.

    Almost every year is a record year and has been since World War II. That's like saying GDP today is almost a record. It doesn't change the fact we're in bad shape.

    Demand is now growing at a faster rate than supply. Mainly this is because yield growth has been linear, or perhaps a little less in recent years, while demand growth has been accelerating for a long time. These big picture trends are pretty clear.

    What's also clear is that prices respond to weather shocks in clear and predictable ways. These relationships tell us how steep the supply and demand curves are, and thus how much prices can go up or down if supply or demand grows faster than the other. The answer is a lot. This means supply and demand are highly inelastic, also for reasons that make a lot of sense if you think about it.

    So, is it a supply problem? A demand problem? Well, take your pick. But the trends tell me prices are going up.

    ReplyDelete
  7. The offer is for A or B, but I am talking about C: investor demand.

    In a nascent market they contribute to developing the market; but in a somewhat developed/globalised market the volatility they bring can be and is being ruinous, in particular to the farmer (and on first reading I am in agreement with your latest post).

    I suggest this as this is from what I have seen. I would be extremely interested in your view on the role of the investor demand/ speculation.

    Colin

    ReplyDelete

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