Monday, April 30, 2012

Food price index rose 5X faster than global per capita GDP since 2000: The real factor that caused the failure of the financial economy.



            It is never easy to approach this subject.  When one wants to point out a problem with global food sustainability prospects, the automatic reply comes in the form of accusations of one holding Malthusian and alarmist views, which have been proven wrong, and will always be wrong.  Presentation of counterfactual evidence is no longer necessary when one has such an impressively effective tool to suppress an argument.  The need for suppression of this issue is found in many social quarters.  Economic interests are in expansion, and that includes the expansion of the consumer base.  Population growth is therefore seen as important.  Religious groups are interested in suppressing this issue, because the idea of promoting Planned Parenthood contrasts with the teachings these establishments inherited from an era which is no longer recognizable to us in terms of lifestyle and circumstances.  Finally, we have our political elites, who simply hope they can continue to stick their heads in the sand and ignore this increasingly hard to ignore problem.  There are no easy answers to this problem; there are no quick fix and therefore politically convenient solutions.  So we lack the mechanism to organize a human response to this already evident and coming humanitarian catastrophe.

A widening gap between food price and economic growth:

            According to the UN’s food and agriculture organization, between 2000 and 2012, the price of food has gone up by 150%, as measured by their global food price index.  This long term structural rise in food prices is unprecedented in history.  There was never a global rise in food prices that we know of in our past.  All previous price spikes were regional, triggered by temporary disruptions in agriculture.  Real global GDP growth during this same period has been a relatively more moderate 50% gain.  On a per capita basis, real GDP growth was about 35% for this period, because we had an increase in the world’s population of about 16%.  In contrast, before the year 2000, in most decades, per capita GDP growth tended to outpace the rise in food prices.

Causes:

It is tempting to sweep this problem under the carpet.  We could blame this problem on speculators and excessive money printing by central banks.  The benefit of doing so is peace of mind.  The cost is failure to tackle the problem.

The real reasons for this increase in the price of food are as follows:

-An increase in the price of inputs, such as oil, which also rose in price by about 500% over this twelve year period.  Other inputs such as potash also rose in price.

-Farmland is becoming more scarce, due to factors such as degradation due to misuse, loss of water supply for irrigation, changing weather patterns (climate change), and encroachment by other uses for the land, such as building residential neighborhoods, use of land by other industries such as mining, or oil and gas extraction, as well as building infrastructure such as rail lines and highways.

-We also have food contamination, and pollution that can cause a drop in food yields.  Such is the case with wild fisheries, which are impacted by contamination, as is the case at Fukushima and in the Gulf of Mexico.  Pollution in the form of agricultural runoff is causing dead zones in oceans.  Overfishing is also causing fisheries to collapse.

-The rate of increase in cereal yields per unit of land has declined in recent decades from 2.5% per year to about 1.5% per year.  So, not only do we have less farmland available, but yields are not advancing as fast as they used to, for reasons such as land degradation, unstable weather patterns, as well as an approach to the limit of what yield enhancing techniques can do for us, such as the use of irrigation, hormones, GM seeds, and the application of fertilizers and pesticides.

-Aside from supply side issues, we have demand side issues to contend with.  The already mentioned increase in the price of oil caused the popularity of bio-fuels to rise, which means that we are now shifting our food supply from feeding people to feeding our transport system.  Effectively, we are pitting gas tanks against people’s stomachs.

-On the demand side, we also have a continuing rise in the world’s population, as well as a rise in the world’s middle class ranks, who demand more animal protein that takes far more land and resources per caloric unit produced than cereals do.

-If speculators are indeed a cause of the rise in food prices, I would put them right where I just did; at the bottom of the list.


Current dangers and dangers ahead:

            The non-food economy rose by only about 25% per capita in the past twelve years, or about 2% per year.  If we were to exclude other commodities such as oil, coal and metals, which also rose in price considerably, the non-commodity advance of the world’s economy has been rather flimsy.

The market economy, as well as the political decision making apparatus, reacts to triggers, such as a change in prices of certain goods in accordance with their natural design.  It has been so far very unfashionable to acknowledge this, but the unwise growth in the supply of credit that we witnessed before the collapse of 2008, was in large part a move to compensate for the rise in commodity prices, which interestingly started at the same time, and took an increasing chunk out of the non-commodity economy.  I know that many want to believe that it was the other way around and the increase in credit and money supply led to a jump in prices, but these people tend to ignore the fact that natural resources production, with a few exceptions, became harder to expand during this period.  Not even the huge surge in prices was enough to accelerate production rates.  At most, as is the case with oil, the rise in prices only led to the prevention of complete stagnation, or even decline in production rates.

            The rise in the supply of credit was not a permanent solution to countering the surge in commodity prices, such as food. The 2008 crash was proof of it.  In the long-run, the continued rise in food prices and other commodities can only lead to global growth rates slowing or even stagnating.  Ironically, this stagnation can lead to a further decline in agricultural product availability, because at this point farmers around the world are increasingly dependent on regular subsidies and disaster relief from governments. Governments are increasingly strapped for cash however, so a collapse in farm subsidies and disaster aid can lead to a further increase in food prices, which then will of course create a further drag on the global economy.  The impending cuts in farm subsidies are already being debated and there will be no other choice but to implement.   The vicious cycle effect can then continue with a further deterioration of our financial abilities to undertake certain projects for extracting commodities that the farm industry is dependent on for achieving current yields, such as potash, phosphate rock and oil.  Let us not forget that commodity extracting companies depend on credit lines to undertake new projects, or expand existing ones.  In the absence of the financial economy being able to provide this credit, extracting companies will scale back.

            At this point, it does not matter if as an individual is politically left or right leaning.  It does not matter if one is living in a democracy or dictatorship.  The one thing that we can all commonly say about our elites is that they failed us.  The missing ingredient that would have made it possible to continue down our current path would have been a global mechanism to keep us from loosing sustainability.  The market economy has often proved itself to be efficient and resilient, but it never contained a mechanism to price in sustainability as an output cost.  As a result we did not get sustainability, we only received market solutions, such as product substitution, which made it seem like our human ingenuity coupled with the invisible hand of the market can conquer all our challenges.  We lost track of the fact that opportunities for substitution are also finite.  The only response we got from the market doubters thus far was to encourage local administrative entities, such as municipalities, countries, or as is the case of the EU, a group of countries to engage in unilateral sustainability projects, which in the absence of global action only serves to endanger a region’s economic sustainability as we can now see with the EU and California.

            There is no telling how bad the situation we are currently in can get.  At the present time, the UN estimates that there are 1 billion people on this planet who are facing outright starvation.  In reality, more than half the world’s population is suffering from a more or less severe form of malnutrition.  Many may get the necessary caloric intake, but not the necessary nutritional intake, due to the higher cost of many ingredients.  In the absence of many inputs such as irrigation, or oil, which we are engaging currently in increasingly complex and expensive projects in order to provide to the global market, we can easily see the current global food output drop by half or even more.  If I am correct, and the rise in the price of food and other commodities is causing the continued long term degradation of the financial economy, in the absence of urgent action, in the form of a global solution, along the lines that I proposed in the form of the sustainability tariff, we are currently marching towards the edge of the cliff, and there will be nothing to stop us from going over it.

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