Global food prices and the terms of trade
Agflation refers to a sustained increase in the general price of foodstuffs and in recent years we have become accustomed to seeing the prices of many basic staple products rising. The era of cheap food looks to be over for now on the back of significant demand-side factors, not least rising population levels, higher per capita incomes and speculative demand for foods as prices have become more volatile. Supply-side factors are also important in explaining strong inflation in food prices. Both sides of the market are discussed by Ambrose Evans-Pritchard in his column in the Telegraph today “Food will never be so cheap again” - plenty of applied microeconomics here in addition to the huge number of macroeconomic issues that the trend rise in food prices has caused. One of the big changes in a switch in the terms of trade away from food importers towards food exporters. But do higher food prices necessarily cause agricultural supply to expand?
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Speculators and Exceptions to the Law of Demand
To what extent are speculators responsible for the increasing volatility of commodity prices? Expectations of price movements for globally traded commodities can have a huge impact on demand in the markets and the bets that speculators make on the forward prices of commodities such as oil can lead to rapid price hikes. We saw this with food and oil in 2008 - with enormous consequences for consumers and producers in developed and developing countries - and perhaps we are seeing this again as 2009 draws to a close. The world price of crude oil is already heading north again towardsa $90 a barrel.
This BBC world service audio report is a good resource on the impact of speculation and its possible links to exceptions to the law of demand where a rise in actual or expected prices can bring about an expansion of market demand.
“The International Food Policy Research Institute in Washington has studied price movements and concluded that they couldn’t all be explained by the fundamentals. And, perhaps most damning of all, a big-time speculator is now identifying speculation as one of the causes in the movement of the price of oil.”
Meeting the challenge of food security
The government has published a new report on what is needed to meet the growing list of challenges to the cost and security of our food supplies in the years ahead. The era of cheap food seems to be over and agflation - high food price inflation - is something that has hit the pockets of millions of families in virtually every country over recent years. This Independent article flags up some of the key policy issues regarding food supply in the UK - a country whose self-sufficiency is under threat as forty per cent of the food we eat is now sourced from overseas.
“In a list of challenges to UK food security are the changing climate, floods, drought, soil erosion, water scarcities and the breakdown of ecosystems. Global temperatures may rise two to three degrees in the next 50 years, threatening large-scale crop failure in Africa..........British households still spend on average less than 10 per cent of their income on food, compared with 70 per cent in many developing countries.”
OCR2888: Understanding Food Price Volatility
The Lex column in today’s Financial Times has a superb piece on why food prices may start rising again raising fresh fears of high food price inflation. The key is to understand the reactions of farmers to changes in prices and the decisions they make about whether to plant new crops on marginally productive land. See this short extract:
“The cost of corn, soya and wheat has fallen sharply from the levels they reached last summer at the height of the commodity boom. But lower prices mean lower returns per acre, so farmers are cutting plantings of marginally productive land to maximise profits.......This is precisely the set-up investors who worry about a rapid return of inflation fear: low prices lead to underinvestment and cuts in productive capacity. When the economy picks up, prices soar because suppliers – in this case, farms – cannot keep up with renewed demand.”
(1) How could you illustrate the process described above with supply and demand diagrams?
(2) Explain why price elasticity of demand and price elasticity of supply is relevant in explaining food price volatility
(3) What do you understand by the term ‘marginally productive land’?
The rest of the LEX column can be found here
OCR 2888: The Social Impact of Agflation
Two of the key themes of the OCR2888 pre-release stimulus material this year are the causes and consequences of rapid food price inflation - something known to economists as agflation. 2007-08 witnessed a dramatic increase in the prices of many basic foodstuffs across the world. Agflation has many demand and supply-side causes (discussed in our toolkit publication) and the economic and social impact is hugely important not just for EU consumers and producers but around the world. This is highlighted by a number of global campaigns by organizations such as the World Food Programme and Save the Children.
A recent Save the Children press release for a food relief programme for people in Kenya makes the point better than I ever can:
“Poor people in the poorest countries were hit hard by the rise in food and fuel prices last year. The financial crisis will hurt them even more, and children are most at risk. Without a big increase in financial resources for the poorest countries, large numbers of children will fall into poverty, drop out of school, suffer ill-health or be more exposed to violence and exploitation.”
And now Save the Children is turning its attention to food poverty in the United Kingdom. This BBC article covers the issue but better to turn to this short video clip. Persistently high food price inflation creates winners and losers (someone somewhere receives the money down the supply chain) but the social consequences cannot be denied especially the dangers of malnutrition and its impact on education and health outcomes among the most vulnerable.
The most disgusting thing since sliced bread
I almost spat out my breakfast this morning when I read this piece of news: Rat meat in demand as inflation bites. Apparently with the price of beef at £2.50 per kilo, the poor in Cambodia can no longer afford it and have to resort to rodent meat, despite that being four times what it cost a year ago. We’ve all learnt about bread and potatoes in our lessons about Giffen goods but this is a rather peculiar example which might not quite make it to the textbooks just yet.
More here from the Guardian: Cambodians eat rats to beat global food crisis and from the BBC: India’s poor urged to ‘eat rats’
Food prices and the UK economy
There is a timely report from Ernst and Young ITEM club on the likely macroeconomic impact of rampant food price inflation on the UK. Brief details below together with a link to the report.
read more...»Will food prices start to fall?
Hugh Pym reports on a decline in the index of global food prices which hints that the recent upwards spiral in the cost of foodstuffs might be coming to an end. Have the underlying supply and demand factors changed? Will food producers around the world respond to the sharp rise in price to give us a supply response large enough to lower the risks of further social and economic upheaval?
Surge in UK inflation
The latest figures for consumer price inflation were far worse that expected. Consumer prices increased by 0.8% in April taking the annual rate of inflation to 3.0% - right at the top of the level allowed by the government as part of the inflation target. Both goods and service price inflation moved higher as the UK economy struggles under a series of cost-push inflationary pressures. I have attached a PowerPoint file showing some of the key inflation charts.
China’s Inflation Problem
China’s inflation rate has climbed to a twelve year high with consumer prices 8.5 per cent higher than they were a year ago. Much of this is the result of the spiraling cost of food (22 per cent higher over the last twelve months).
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