Global wheat and corn prices have doubled over the last two years. Stocks are at historic lows despite good harvests. Indeed, the rise in food prices has been universal across the globe, affecting the prices of practically all food items, including meat, eggs and milk. Fears that food demand may outstrip supply have kept surfacing every now and then since Thomas Malthus? celebrated essay on population in 1798. The last big scare was in the 1960s and 1970s, largely fuelled by the Club of Rome?s doomsday scenario that the population explosion in developing countries was not sustainable.
That fear was overcome with the development and propagation of high-yield varieties of food grains generated through crossing different strains, and more recently, genetically modified strains, that raised productivity dramatically. While the human population continues to increase, for the first time since the Industrial Revolution the rate of growth is declining, and so the population is projected to peak sometime in the middle of the current century. The pressure on food supplies is not on account of population growth, but on account of shifts in foodgrain usage away from direct human consumption.
Food demand is rising fast as large numbers emerge from poverty. The use of grain for bread is linked to the world?s population, but this has been flat for decades on account of the slowing population growth. The demand for meat, however, is linked to economic growth, which has been rising globally over the last decade. Per capita meat consumption in developing countries has risen by about two-thirds since 1990, the average annual per capita consumption of meat in China having increased from 20 kg in 1985 to over 50 kg today. It takes 5-7 kg of grain fodder to produce 1 kg of meat.
Changes in dietary patterns, however, are slow and incremental, and cannot explain the dramatic price movements of the past year. Increasing diversion of corn for biofuels, which has a cascading effect on the price of wheat through diversion of wheat acreage, and for feeding cattle, probably can. According to World Bank estimates, the grain needed to fill up an SUV?s tank can feed one person for an entire year!
The use of maize for producing ethanol in America has increased from 15 million tonnes a year in 2000 to 85 million tonnes presently. It is estimated that up to 30% of the entire American corn crop could be diverted for biofuel by 2010. America accounts for some 40% of the global corn production. The sharp spike in oil prices, as well as generous subsidies given by governments, is making biofuels an increasingly attractive option.
Commodity analysts believe that heavy agricultural subsidies in recent decades had deflated global food prices and made investment in agriculture unprofitable in many developing countries. While OECD countries were formerly exporting agricultural deflation, they are now exporting ?agflation?.
It is entirely possible that the current food supply scare may eventually subside through a robust supply side response. New farmland could be ploughed up, and technological advances made, to ratchet up production. In the short-term, however, foodgrain prices may hinge on oil price trends and subsidies. High oil prices could also depress the use of oil-based fertilisers?and hence productivity?that have been behind much of the increase in farm productivity over the past half-century.
Agflation also has a less talked about monetary fallout. Since food has a major share in the consumer price index in developing countries, they have tended to tighten monetary policy to control inflationary expectations, even as OECD countries are moving to lower short-term rates in response to the financial turmoil arising out of the subprime housing mortgage crisis. This is widening the interest-rate differential between rich and emerging markets and exacerbating the surge in capital flows from the former to the latter.
?The writer is a civil servant. These are his personal views