Paul Krugman, the noted New York Times economist and columnist, wrote in his blog today (“Grains Gone Wild”) that “the current food crisis may well be a bigger deal” than the financial crisis. Here’s what he said:
What I don’t quite understand is why food prices have spiked so dramatically. Demand has been rising for a number of years; bio-fuels is a big thing, but how much bigger is it this year than a year or two ago? It can’t be speculation: that raises prices by inducing stockpiling, and stocks of wheat and rice are at or near record lows.
Important stuff. We need to figure this out.
There are, of course, a host of factors that have contributed to the emerging food crisis. Numerous observers, including UN secretary general Ban Ki-Moon, have referred to it as a “perfect storm.” Among the factors cited most often are: 1) increased consumption of meat in China and other developing countries; 2) global population growth, 3) diversion of agricultural land to biomass production; 4) drought and other climate changes, 5) and the rising costs, mostly due to rising fuel prices, of fertilizing, cultivating and transporting crops.
Most of these factors are not going to go away anytime soon. That’s why the World Food Programme, the Food and Agricultural Organization, and the World Bank have been warning that the food crisis could persist for 3-5 years…or longer.
A global recession might temporarily dampen appetite for meat, the Australian drought might ease, and the U.S. and European countries might someday reverse course on biomass subsidies, but factors like population growth and climate change do not turn around on a dime, and most experts believe that the era of cheap fuel is over.
As to “grain prices gone wild,” that’s what happens when growing demand hits an inelastic supply curve. Global grain reserves have been dropping for several years. Reserves are now at the lowest level in decades. When reserves get that low, and supply doesn’t respond, it doesn’t take much to make grain prices soar. We don’t need to “figure that out.” That’s basic economics.
But what, we need to do, as Krugman blog suggests is “figure out” what can be done about it. The first thing, of course, is don’t make matters worse. But that’s what happening.
More and more countries are restricting grain exports—and thereby restricting the amount of grain that grain-importing countries have access to. Today, India announced that it was banning exports of non-Basmati rice. That may help keep a lid on the price of rice in India, but it will make things worse for countries like Bangladesh, Indonesia and the Philippines.
And, despite the food crisis, other countries are still increasing subsidies for biomass. Britain this month is boosting the biomass requirement for its motor fuels. Meanwhile, the European Community, as a whole, is continuing to ramp up support for biofuels.
But what we really need to figure out is whether there is any relief in sight, or whether the current food crisis is just a taste of things to come. Can we—in the face of climate change, rising fertilizer and fuels costs, growing water scarcity, and changing global diets—plow enough new farmland and raise agricultural productivity enough to feed an additional 2.5 billion over the next 40 years?
That's the big question. And we need to figure it out sooner, rather than later.
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