The agonies of “agflation”

In: Uncategorized

9 Dec 2007

Cheap food is one of the great achievements of humanity. Despite the sneering of environmentalists the available of cheap and abundant food – at least in the developed world – is to be celebrated. Thanks to enormous increases in productivity we no longer live on the edge of starvation.

It is therefore worrying that food prices have started to rise. The Economist, in its lead comment this week (6 December), estimates that food prices have risen by 75% in real terms since 2005. This follows a fall by three-quarters in real terms from 1974-2005.

According to an accompanying briefing in the Economist there are two main reasons for the rise in prices. First, rising incomes in Asia means that people are consuming more meat which in turn bolsters demand for animal feed. Rising meat consumption is closely correlated with economic growth and therefore welcome. However, this is a long-term trend which does not explain the sudden surge in prices. Second, is the increased demand for crops such as maize to be converted into ethanol for fuel. There is nothing wrong with this development in principle but it is necessary to ensure sufficient food is produced as well.

It is clear that the urban poor suffer as a result of the trend to agflation. They have to pay more for their food both in absolute terms and substantially more relative to their incomes.

But it is doubtful that most of the rural poor benefit from higher prices. Those that are landless still have to pay for food. And the main problem facing most third world producers if low productivity rather than low prices.

Recent publications which examine this trend more closely include an article in Finance & Development from the International Monetary Fund (IMF). There are also relevant sections in chapter one (PDF) of the IMF’s most recent World Economic Outlook. More broadly the latest World Development Report from the World Bank is about agriculture and development.

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