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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Sugar prices and production and investment incentives
World sugar prices are close to a 30 year high with values on the Chicago mercantile exchange hovering just under $30c per pound. For countries whose sugar exports account for a large proportion of their export earnings, the steep increase in world prices has brought about an improvement in their terms of trade and - because demand for many foodstuffs is price inelastic, a favourable change in their balance of trade. A good example of this is the African country of Mozambique, a nation almost destroyed by a long running civil war that eventually ended in the early 1990s but which has also been hit in recent years by severes drought hit many central and southern parts of the country, including previously flood-stricken areas. And where half of the population must survive on less than $1 a day.
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Walmart and Amazon Price War - Hyper Efficiency and the Consumer
A well publicised price war has broken out in the United States between Walmart and Amazon. Wal-Mart’s $10 promotion applies to the top 10 books coming out in November but the company is also selling 200 best-sellers for 50% of their list price. In a move that has sent shock-waves through the book industry, Wal-Mart has announced it will be selling 10 forthcoming books for just $10 each including Sarah Palin’s autobiography. As is often the case when an aggressive price war breaks out in an oligopolistic market, online bookseller Amazon matched the price cut within hours causing Wal-Mart to cut again to $9. Amazon returned the favour and Walmart has sinced shaved one cent to $8.99! The FT reports that Walmart’s website, the second busiest in the US after Amazon, has also cut prices by 50 per cent on 200 best-sellers.
The battle comes at a time when both Walmart and Amazon are under pressure from Google who are rolling out an online site capable of delivering e-books to any device with a Web browser, with an initial library of about half a million titles.
How long the price war will last is open to question. The October-December season is a hugely important time for all booksellers - the festive period is the peak time for sales and the intense battle for market share comes at a time of great change in the industry - not least the rapid growth of e-readers and online libraries. Some book publishers fear a price anchoring effect on their industry - namely that Walmart slashing prices and rivals following suit will lead book-buyers to expect new titles to cost $10, a low prices that would force the publishing industry to re-scale its entire business, including the advances paid to writers and ultimately affect the range of titles on offer.
For the giants of the book retailing industry, the economies of scale and drive for hyper efficiency in getting products to the market are simply a way of reinforcing their market dominance.
But what about the impact on smaller independent booksellers most of whom can never hope to compete on price but who provide light and shade in the book selling industry.
It is a reminder that there are different types of efficiency. Allocative, productive, dynamic and social. The latter two may be damaged if the price war escalates and many smaller booksellers go under. This BBC world service news interview focuses on some of the cultural issues of the rise of the giant retailers. Chris Doeblin from the independent Book Culture shop in New York City accepts that supermarkets will bring the price of books down - as they have with food prices - but at a (social) cost to many of us.
Guardian: US bookshops urge regulator to investigate online price war
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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.”
Explaining the Malthusian Trap
Tom Aedy outlines the essence of the Malthusian Trap and its contemporary relevance!
read more...»Explaining the Malthusian Trap
Dugie Young explores the idea of the Malthusian population trap. Is the prediction of Malthusian misery coming back into focus?
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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.”
Information and Consumer Choices - Two Stories
Two stories on the role that information can play in influencing our choices caught my eye today.
The first is a new report from the Food Standards Agency that claims that there is little difference in nutritional value and no evidence of any extra health benefits from eating organic produce. Given that organic food in most of the major supermarkets carries a price premium, will more people decide that, leaving aside ethical and environmental considerations, the supposed health benefits from organic produce has been exaggerated? The recession has made life tough for organic farmers; this report will do little to help them, no surprise that one of the leading stakeholders, the Soil Organisation has laid into the report!
The second is a damming report on the health effects of tanning machines from the International Agency for Research on Cancer - reported here by the BBC - that claims that sunbed use is on a par with smoking or exposure to asbestos. Again an industry stakeholder the Sunbed Association has been quick in putting forward a defence.
Information failure is a key cause of market failure. I suspect that consumers who enjoy flaunting their organic credentials and who swan around with a fake tan have both been conned for many years and spent a small fortune in the process!
Economics Snapshot - Water Footprints
An area of growing concern is the water footprint of the goods and services we consume. The Worldwide Fund for Nature has estimated that each Britain effectively uses 4,645 litres of water a day to produce the food on our tables and the T-shirts on our backs
*One cup of fresh coffee needs 140 litres of water to produce
*The production of one kilogram of beef requires 16,000 litres of water
*One litre of beer consumes less water (300 litres) than one litre of orange juice (850 litres)
*A meat and dairy-based diet consumes about 5,000 litres of virtual water a day while a vegetarian diet uses about 2,000 litres
*Agriculture worldwide accounts of over 85% of fresh water usage
Source: Sustain Campaign for Water Labelling (pdf file download)
Government Failure: Thai Rice Buffer Stock
Over the last twenty to thirty years, buffer stock schemes introduced by national governments or collectives of producers have been riddled with problems. The fiscal costs of buying the storing products purchased at guaranteed minimum prices have come to haunt many governments including those in the EU who paid billions of euros for inefficient and inequitable farm support policies. Here is another example of a misguided price support scheme - the Thai rice mortgage scheme introduced a couple of years ago when global food price inflation was at its most severe.
According to this excellent piece from the BBC, “The Thai government is now sitting on a vast stockpile of rice that it bought at peak prices. As the country is such a big supplier to the world market, it cannot sell all this rice without depressing prices even further.” And the gains have been unevenly spread...."rich farmers in the central plains are in areas with irrigation, so they can grow something like three crops a year.....poor farmers in the north-east, they don’t have surplus of rice to sell, so they don’t benefit from this programme at all.”
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