I just want to put up the summary about the reasons behind rising food prices that I’ve got after reading and listening many educated opinions. I also want to deny the popular misconceptions that some people have. Of course this is just my opinion.
The main reasons I know are:
- Most important is the increased wealth around the globe. Wealthy people eat more meat and less grain, but it takes a lot of grain calories to raise cattle. Some people used to say that wealthy people consume pretty much the same amount of food as poor people. This is wrong. The amount of grain needed to produce one meat stake is enough to feed more than 50 people. Feeding grain to cattle produce major shortages
- Ethanol policies in US. We just burn food and we also burn a lot of fossil fuel to produce this food, this is very counter-productive and must be stopped
- Climate change. There is permanent (10 years) drought in Australia, for example. Ask Al Gore for details
- Free trade failure – many countries are restricting food exports in order to control domestic prices
The reasons that are often mentioned but are completely wrong:
- The falling dollar. This is wrong because food prices are rising all around the globe, without any relation to dollar or to any other currency
- This is a result of Bernanke lowering interest rates. Wrong, as mentioned above this is unrelated to dollar, hence unrelated to whatever Fed policies are
- The food prices are rising because of inflation. Wrong. This one is the most hard to get even for the best minds around, like Barry Ritholtz. Inflation is when the money supply and money velocity are growing faster than supply of goods and services, i.e. inflation is a monetary phenomena. There are countries that are experiencing strong inflation, there are countries where inflation is much lower, but the food prices are on the rise everywhere no matter what the inflation rate is. If you carefully examine the 4 reasons I listed in the first section they clearly show fundamentally increased demand and fundamentally decreased supply. I don’t see the inflation to be the part of this equation
April 22, 2008 at 2:53 pm
There is one shocking conclusion from what I’ve said above, and I think it’s very important.
We know that:
1. A wealthy person is eating up to 50 times as much as a poor person (in terms of the food pyramid)
2. The amount of food that can be produced on Earth is limited
Conclusion:
The proportion of poor and wealthy people living on Earth is a fundamental value. Any distortion of this proportion is temporary and will swing back
April 22, 2008 at 7:12 pm
Roxy:
Malthus also made the same argument (# 2) and was proven wrong.
Food supply will be limited till we upgrade the technology and bring more land under irrigation.
Shankar
April 22, 2008 at 10:08 pm
Shankar, I think soil is essentially accumulating certain amount of solar energy and when you grow something you are extracting that energy. The amount of energy the plant contains exceed the energy it gets from sun during its lifetime. The bulk of energy comes from the soil.
The only difference from fossil fuels is that soil can be recovered, but it may take 10s of years for every field.
With those ethanol policies we are burning that soil. Maybe we have plenty, but it has to be counted.
The article I’ve linked says we can feed 800 mln, so you are right, but we don’t do that.
April 23, 2008 at 12:12 am
Got it. Thanks.
- Shankar
April 23, 2008 at 12:35 am
Rising world population has nothing to do with it?
April 23, 2008 at 2:03 am
I would have to say I agree with you. I’ve been looking at the shift in diets in China and India and how their increased meat intake will mean productive land is used to harvest grain for these animals which will mean less rice and other dietary staples are produced. It is fascinating but also quite scary.
Cheers,
Leigh
April 23, 2008 at 2:42 am
Whatever the reasons are,what’s more depressing is that our resources to spend are still stagnant. It’s bad enough that food prices are rising, what’s worse is that our salaries are still the same. People in third world countries are struggling and lining up in the streets to buy government-sold rice because the commercial rice cost 300% more. They worked the hardest yet their spending power remain below par.
April 23, 2008 at 7:41 am
Roxy , I agree that with certain food products ( rice and wheat come to mind quickly ) , we are seeing protectionism as per your point 4 above. In that regard , it will be key to see if the Thailand also adopts export curbs on rice , which is an essential and very political food commodity. Hoarding globally and food rationing ( happening on the West Coast here with Costco limiting rice purchases by consumers ) , is a sign of the times. One must also consider when we once again may expect to see gas lines here in the states as production hits the wall in Mexico , Saudi Arabia , Russia ,and the North Sea… if rice is being hoarded , why not oil ? Why sell oil in ever falling dollars to the US as compared with euros / rubles , mexican pesos , bolivares , etc ? The current dynamic of inflation , dollar depreciation and revulsion , coupled with the desire to purchase and / or hoard valuable commodities that people need point to a perfect storm of upward rising prices.
April 23, 2008 at 8:04 am
Well there is a limit to foot production but we are FAR from it. Not even at 10% of it. There is a much more real limit on the amount of meat that is produced but we are still far from that. There is still so much empty land and empty ocean and food can be produced in both. The US could double production in a few years of the government would stop restricting things.
The rising wealth is, by far the main reason that food prices are going up (As you said). For the short term, it is also the fear of shortages, so the middle class and rich in many places are stocking up, buying much more than normal, and causing shortages. This can’t happen forever and prices will settle down.
Jason Dragon
http://blog.capitalactive.com/
April 23, 2008 at 2:37 pm
In the Ringing Cedars series of books, a lot of attention is given to the use of small garden plots by families in Russia. These plots were given to families for free, and are usually located on land that had minimal previous use.
A dacha settlement will have many small plots of about 20 x 30 m, and they frequently become summer cottages for city families that now own them. These small garden plots now produce 70 % of the food comsumed by the people of Russia.
There are simple solutions that are sitting right in front of us. Technology sucks when it comes to food production.
April 23, 2008 at 3:51 pm
FWIW: The main reason for a surge in food prices and a decline in supply is drought that has struck in many regions around the worlds. Plus abnomal weather has also decreased the crop yeilds. Austrialia, which has been a major grain exporter has been experience a severe drought over six years. Its grain production is down about 90% from is usual production.
China and India have also been experience growing water shortages for irrigation. China also had a very severe winter this year that has impacted winter wheat yields. China has also started filling up the Three gorges damn which is destroying hundreds of thousands of fertial acres. A significant amount of India’s irrigation is dependant on ground water and the demand for ground water is far exceeding its replacement. Every year the wells have to be dug deeper and deeper to reach the falling water table. Some farmers are unable to afford the expensive deep well pumps now required to pump ground water.
Fertilizer shortages are another significant factor, as fertilizer production plants close in regions that lack abundant Natural gas supplies because of the high cost. The cost of phosphates are also on the rise as the easy phosphate sources (coral islands) are being depleted. The costs for Fertilizer has soared by 10 times the price just a few years ago.
There is suburban development that is consuming some of the worlds best farming land to make way for residential homes and strip malls. Farming is being pushed into regions where the land is acceptionally cheap, which is usually of less quality soil and more dependant on irrigation. For instance in the US urban development on on the East and west costs is pushing out farming into the mid-west regions which has less rainfall, and the soil isn’t as fertial. This is happening in the developing world such as China and India.
Finally, there is an aging farmer workforce. I believe the median age for farmers is near 60 in the US. Younger people aren’t interested in farming as they choose to move to urban regions instead of taking over the family farm. In the not too distant future, there will be a storage of US farm labor (unless perhaps we import foriegn farmers) as farmers retire or are simple unable to farm because of failing health.
Jason Wrote”
“For the short term, it is also the fear of shortages, so the middle class and rich in many places are stocking up, buying much more than normal, and causing shortages.”
The grain surplus has been falling for over a decade. You’ll have to go back to 1997 to see an increase supply of grain. Its unlikely that prices will fall and supply will increase significantly until the drought subsides.
Shankar Khadye wrote:
“Malthus also made the same argument (# 2) and was proven wrong.”
Malthus was wrong on the date, but in the long run, his theory is correct. We live on a finite planet with finite resources. For the past 200 years, we have tapped a stored energy source that taken hundreds of millions of years to accumluate. Every day the human population consumes the equivalent of 400 years of stored sunshine from fossil fuels. Sooner or later these resources will be depleted and the planet will not be able to support the 6.5+ Billion human population.
April 23, 2008 at 4:12 pm
Today rice is trading in the $25 area. It was $10 earlier this year
April 23, 2008 at 4:24 pm
TechGuy – amazing
April 23, 2008 at 4:54 pm
Love the blog, but got to disagree with you on this one…
You say falling dollar is not to blame for rising food prices. Then how come this year’s acceleration in dollar decline coincides perfectly with jumping food prices?
You say food prices are rising uniformly around the globe… that’s impossible; food prices in Euros has gone up less than in dollars.
I do not believe that it is an accident that dollar-pegging countries (China, Egypt, for ex.) have the worst food inflation.
April 23, 2008 at 6:35 pm
#14, Roxy, you rock but you are way off on this one. I’m with Obfuscation and he rightly pointed out that the worst peggers have the worst food inflation. This is not a coincidence.
There is always a fundamental story that bulls can point to but this is not about fundamentals, its about currency and interest rate manipulation – specifically Asian and petro-recycling regimes and the slowing US economy.
As the US economy slows, our demand for oil (and also crappy Asian goods) is also slowing. The refiners have often talked about a very real liquid oil glut. This flies in the face of ever-rising demand theories. If the demand was so high, why is there a global crude glut? The prices NEED to be ever-higher so that the Arabs can recycle this money back into treasuries and agencies as part of the Godfather Protection Racket. Our debt-based currency is in free-fall and is being artificially supported by recycling operations and this keeps interest rates artificially low as well. Now these higher oil prices aren’t quite enough to support the massive inflows of FCB capital into treasuries and agencies so these countries print in their OWN currencies to make up the difference. This causes massive crack-up-boom inflation in their own countries.
Oil may need to be $150 or even $200/bl to offset some of these CUB printing effects and so it will march ever higher until the infamous bond bubble finally pops. The problem with CUB economics is that eventually it causes REAL shortages of things. Take refiners and the crack spread for example. If the refiners can’t pass along enough of the higher crude costs, eventually they will have to cut production. We saw this same effect with the airlines recently – how much money can they stand to lose without cutting production? And once they do, REAL shortages develop. It could be argued that the whole ethanol boondoggle is really no different than Bush’s decision to double the strategic oil reserve. We NEED high oil prices so the petro-recycling can continue into treasuries and an oil glut makes it hard to drive oil prices higher. Remember, there needs to be a good fundamental STORY about why oil should be so high even though the real demand isn’t there. The PTB know very well that it takes more oil to make ethanol than it displaces in the fuel supply.
Remember a couple of years back when oil briefly dipped below $60/bl? The Arabs promptly dumped boatload of treasuries on the market and the 10-year spiked hard. I remember this very well. The next day, the energy secretary announced that there would be a doubling of the strategic reserve and oil prices started their ascent. Yields quietly moved back down a couple of days later and the petro-recycling crises was delayed. But the problem never went away, it still lurks in the background ready to destroy the bond market and the economy.
Really, you guys need to be a lot more cynical. Why do we fight expensive wars? To secure natural resources? No. There is a GLOBAL elite oligarchy that is in control of all central banks and world resources. We fight wars to create debt which pays the Federal Reserve (and other pigmen bankers) interest. This is similar to 1984 where Oceania, Eurasia, and Eastasia were constantly at war for no real reason other than to control the masses and destroy expensive machinery (to presumably create more debt in the analogy.)
Long term, TechGuy is right about much of what he says but I don’t think that’s what’s causing this massive crack-up-boom in commodities and food. There is something far more sinister and immediate in the works. Winter has talked about an imminent waterfall bond collapse of 30-40% coming in the next several weeks and he may be 100% right about this. If this happens, look for a break in the CUB and the vicious petro-recycling that is driving the CUB.
Then you will get to see how real the commodities and food inflation is (or isn’t.) We’ll also get to see how real this interest rates are.
April 23, 2008 at 8:30 pm
You should emphasize more on food being used for ethanol and less on global (lol) whining, er, warming.
The last person I’d see for any advice is that snake oil dealer Al Gore.
~Sisyphus, http://www.tsfiles.wordpress.com
April 23, 2008 at 9:45 pm
IMHO, The relative value of the world’s currencies is only exacerbating an already fundamental supply/demand imbalance in food and energy that Roxy nicely articulates above.
Econobrowser addresses this topic very well.
http://www.econbrowser.com/archives/2008/04/commodities_and.html
Fear is much stronger than greed and human nature will only compound the problem through hoarding. While I believe in the near-term the food issue is solvable I am less confident in the outlook for oil which will eventually recycle back into food. Listening recently to an energy analyst from Merril on Bloomberg I was amazed by a statistic quoted. According to the analyst, oil production during the rebuilding of post-war Europe of the 1950′s and 1960′s increased 6% YoY, today we are lucky to increase production rates (new oil) by 1%.
Additional fundamental oil supply issues:
1. Existing oil production decline rates are rising and currently fall somewhere between 5-8% annually (conservative average) and could decline faster as demand and technology drives methods for greater extraction rates
2. Aging Infrastructure (I believe this issue may be attributable to Russia’s suprising 1% YoY decline rate published by WSJ
3. Aging Workforce
4. No significant discoveries in the last 10-20 years
5. Per EIA data, present (Dec 2007) World Oil production is 85.8 mm bbl/day and consumption is 86.2 mm bbl/day – also, until Dec. 2007 the world has failed to increase its production of oil since May, 2005 (scary!)
From the current world statistics from BP, I believe the present run out rates for existing oil production is between 40 or 50 years. However, no one waits for the end and demand, technology and mother nature will attempt to cut that time in half – in my opinion.
I am concerned there may not be enough time to develop and implement viable energy substitutes – time will tell.
Great blog Roxy!
April 23, 2008 at 11:02 pm
Obfuscation – I’m thinking about that. Maybe you’re right.
Darth Toll – this is very interesting. Looks like the big guys want the total control on both food and oil prices and hence the powerful tool to control the world. The prices can’t be too low, can’t be too high, or sometimes they can be too high when needed.
The dependency between oil and treasuries has to be investigated. Will do.
April 24, 2008 at 4:16 am
Theroxylander,
I was all set to post something angry and along the lines of what Darth Toll posted (though I disbelieve the tightness of his oligarchy). But the debate was so reasonable and the points so varied that I learned enough by the time it was done that my anger was gone. Good blog. Good comments. My two cents: Don’t make this harder than it has to be. This is a money problem, part and parcel with the financial markets cracking up and stupid, flighty money looking for a place to land. Everything it thrown crazy. Farmers no longer know how to hedge, investors don’t know what good metrics are, goverments are getting protectionist. Malthus was an idiot. Machiavelli was a genius. Our “oligarchy” is powerful but not genius.
April 24, 2008 at 3:37 pm
Darth Toll Wrote:
“If the demand was so high, why is there a global crude glut?”
Where do you see a global crude glut? Demand for Oil is well above production. Right now, all of the major oil companies are searching in the Artic for the last untapped fields. If there was an oil glut than there would be no need to go searching for Oil in inhospital places.
Justenuf2bdangerous wrote:
“I am concerned there may not be enough time to develop and implement viable energy substitutes”
There aren’t any real alternatives to oil and gas. Oil and Gas are dirt cheap to produce and liquid fuels are really the only option for most transportation fuels. Besides provideing fuel, Oil and gas are chemical feedstocks from everything you touch today. Even the food that you eat uses natural gas to produce pesticides and fertilizers, dry grain, and oil is used to harvest and ship food from the farms to your supermarket.
Justenuf2bdangerous wrote:
“I believe the present run out rates for existing oil production is between 40 or 50 years”
That estimate does not tell the whole story. Oil will likely be extracted from the ground for thousands of years. The important issue, is how much will be extracted per day. Currently all Oil companies are using water injection to maintain high extraction rates. Over time, the fields become “watered out”, as the majority of liquid is extracted isn’t oil, but water. When a field oil column disappears, production drops like a rock. Had it not been for massive use of water injection, oil production would have peaked about 2 decades ago. That would have been far better, because we are rapidity burning through the remaining oil at our futures expense. This will almost certainly result in a sharp downward slope rather than a nice shallow downward slope.
Consider for instance a bottle of water with a small hole. When the bottle is full, the water comes out like a stream. Over time as the water is drained the pressure drops causing the flow rate to decline. To adjust the flow rate you can make the hole bigger, but the bigger the hole the faster the bottle will run out. Thats what is happening now. The amount of oil that can be extracted from the oil field is fixed, we can only control the extraction rate, but the faster we drain the fields, the less time we have left.
I think we are about to come off the production plateau soon (probably with in about 9 months). With in the next two or three years we probably see some very serious oil production problems. This will cause the price of oil to continue to rise even in the face of demand destruction. Another important factor is that most OPEC nations have rising teenage populations that are now reaching driving age. Fuel consumption in these nations is fueled by soaring number of people buying cars and cheap subsidized gas (25 cent to 75 cents in most OPEC nations). All that consumption means less oil exported to the West and Asia.
Links of Interest:
Russian Oil Output May Fall for First Time in Decade in 2008
ww.bloomberg.com/apps/news?pid=20601072&sid=arXTpOY4omL4&refer=energy
Saudi King Abdullah Drops Quiet Bombshell
http://www.rightsideadvisors.com/public/commentary.go/rsa/commentary/comm-energy/20080422_024110_msg.html/Saudi-King-Abdullah-Drops-Quiet-Bombshell-.html
Lukoil Exec says Russian Production has peaked
blogs.wsj.com/environmentalcapital/2008/04/15/peak-oil-da-say-russian-oil-execs/
April 24, 2008 at 4:33 pm
Global warming is a lie and Al Gore is a proven liar. Anyone who believes him is a fool.
April 24, 2008 at 4:58 pm
TechGuy: I believe we are on the same page – I left out the esoteric details of well fracturing and injection technologies. The main concern is the exponential rise of declining production rates that will begin to occur – perfect example is the Mexico Cantarell field
There is one caveat to the statistics which is that no one really knows the exact production and decline rates of “all” the world’s wells due to the fact these countries won’t allow independent audit and logging to occur.
I bet you anything that sovreign countries are hoarding oil in their strategic petrol reserves – example United States. It is hard to drive a tank with no gas. The US Congress is full of detached morons if they want to cease filling the SPR or cut fuel taxes just to lower the cost of gas – WTF!
Agree there is probably no alternative to oil and gas but the masses can all drive much smaller, lighter electric vehicles as an alternative. So what if we have to build one or two nuclear reactors in every city – still better than the alternative.
April 24, 2008 at 11:20 pm
Roxy,
I have to disagree with you on a least one point here. It is true that the production of meat requires more grain input. However part of what I believe we are seeing here is driven by peak oil and drought. Food which is a commodity, is produced using oil in the production of fertilizer, in use of farm machinery, and lots of water. Food is also being converted into fuel. Oil and gold both are suffering from the ills of inflation. Oil and gold have increased in price by a factor of four since 2001. Food has increased by at least a factor of four since then. these commodities have maintained a relatively stable cost ratio with each other (i.e. 2001, oil at $25/barrel, gold at $250/oz, implying a 10 to 1 ratio between gold and oil, today gold at $1000/oz, oil at $110/barrel, with approximately 10 to 1 ratio). This points to simple plain dollar devaluation due to mis-management of the dollar by the Fed and the Treasury. I would also add that most hoarding is being caused by nations trying to limit the cost of food, not necessarily an actual shortage in those nations. There is a lot of farmland that can be put into production if there are profits to be made,..
April 25, 2008 at 9:55 am
[...] of all is the continuous disruption of the world food economics. After I’ve tried to explain the sharp increase of food prices by simple supply and demand the collective finger was pointed [...]
April 28, 2008 at 9:42 am
as I have posted before, capitalism is a failure… america used other countries as slaves and now those slaves got bigger and got hungry
April 19, 2009 at 2:10 pm
how does america ply the role
April 19, 2009 at 2:10 pm
how does america play the role
May 5, 2013 at 4:31 pm
Post writing is also a excitement, if you be acquainted with after that you can write otherwise it is complex
to write.