In: Uncategorized24 Aug 2012
This Perspective column was first published in Monday’s edition of Fund Strategy.
Substantial rises in food prices tend to bring out the worst in today’s generally green-tinged market pundits. Typically they issue doom-mongering warnings about the dangers of rising population and greater prosperity before advising investors how to take advantage of the situation.
This is not to deny that rising food prices can be a devastating problem; particularly for the world’s poor. But the pessimists typically make matters worse with their pronouncements. They generally over-state the challenge that short-term rises in food prices pose. Even worse, their fatalistic outlook tends to discourage constructive responses to the problem.
It is also not hard to discern an undertone of moral disapproval of rising living standards in emerging economies. The implicit message seems to be along the lines of “the poor, how dare they, actually want to eat meat!” Meat consumption, it seems, is OK for rich westerners but it is somehow inappropriate for the hoi polloi.
Of course often it is often seen as politically incorrect to state such arguments bluntly. That is why the deliberately ambiguous term “sustainability” is often used instead.
The impact of the American drought on grain prices is the latest cause for concern. Key crops such as corn (maize) and soya beans have surged in price. These are not just important in themselves but also as inputs into other products. For instance, much of the corn is used to feed livestock, it is also an ingredient in many food products as well as, controversially, fuel ethanol.
Before looking at recent developments it is necessary to go back to first principles. Until these are properly understood – and they are widely confused nowadays – it is impossible to make sense of the current situation.
Imagine an island, let us call it Olympia, which is cut off from the rest of the world. Back in 1800 it had only 1000 inhabitants. It was also so poor that only a tiny minority could afford to eat meat. Animal flesh is always relatively costly to produce as it takes several kilogrammes of grain to produce each kilo of meat.
Now let’s wind the clock forward to the present day. Olympia’s population has grown to over 7000. What is more a much higher proportion of its population can afford a carnivorous diet.
What has happened to food prices? Not only has the population risen substantially but it has also become more affluent. Following the logic of most of today’s market commentators it seems indisputable that prices must have risen substantially.
But hold on. Attentive readers will have noticed that Olympia’s population growth exactly mirrors that of the earth as a whole over the same period. Just multiply all the figures by one million.
Yet the long-term trend over that time is for food prices to fall sharply. Matt Ridley gives some statistics to illustrate this point in his excellent The Rational Optimist (Fourth Estate 2010). Back in the late 1790s the average English farm labourer spent about three-quarters of his income on food. There was little left beyond subsistence. In contrast by 2005 the average consumer spent just 14% of his income on food, drink and restaurants. Not only has food become much cheaper in real terms but the range and quality has improved hugely.
Life in the poorest countries is clearly substantially harder but it is still much better than in 1800. In modern Malawi, for instance, the average rural peasant woman spends about 35% of her time growing food. This is much more than in the West but substantially less than the average Briton two centuries ago.
It is still tragically true that there are about one billion people in the world who go hungry. Solving this problem demands not only improvements in food production and distribution but economic development more generally. For instance, for those without electricity it is much harder to store food to stop it rotting. Roads are also often needed for efficient transportation.
Nevertheless the state of the world’s food is much better than that Thomas Malthus, intellectual godfather of today’s green pessimists, predicted back in his An Essay on the Principle of Population (1798). For him the world’s population would be kept in check by famine and war. Yet the world has become far more affluent, better fed and populous since he wrote.
The current generation of pessimists make essentially the same error as Malthus. They focus on rising consumption without appreciating that production can and does increase too. Indeed the history of the past two centuries can be understood in broad terms as that of production growth far outpacing that of consumption. That is why we can be both more populous and better off.
Of course it does not follow that because challenges were vanquished in the past they will necessarily be overcome in the future. Success depends on exercising ingenuity to ensure that productivity is increased further. But Malthusian pronouncements only make that harder to achieve.
As for the specifics of the American drought there are good reasons to believe its impact is being exaggerated. For example, Robert Paarlberg, an American agricultural expert, has pointed out that America’s Department of Agriculture is still projecting the second highest corn crop ever (“No need to panic”, China Daily, July 20, 2012). Falling energy prices also mean a cheapening of a key input into food prices.
There is also the absurdity of America’s Renewable Fuel Standard law that insists that large quantities of corn are used in automobile fuel. If that measure – originally conceived as an environmentalist initiative – was suspended it would put considerable relief on prices. This is not to say that biofuels are necessarily a bad idea but producing them out of food crops in the middle of a drought is clearly foolish.
The American drought presents a challenge but not an insurmountable problem. Rather than give in to fatalism it is necessary to exercise our remarkable capacity for finding ingenious solutions.
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