My take on rising food prices

There follows a comment by me on rising global food prices from the latest Fund Strategy magazine (12 May). It is linked to a longer cover story I wrote on the subject.

The world seems to be suffering from the delusion that there is a chronic shortage of food. Rising consumption of food in the developing world and the growing use of biofuels is said to be bolstering demand and therefore raising prices. Many fund groups are also harnessing such arguments to encourage investors to put money in their shiny new agriculture funds.

Problem is there is little basis to such arguments. As Daniel Ben-Ami shows in this week’s cover story the rising demand for food inside, for example, China is largely met from rising productivity inside the country. Even America’s Department of Agriculture concedes that China is largely self-sufficient in food. It is unlikely therefore that Chinese demand is pushing up prices on the world market.

Biofuels have played a role in pushing up prices in the short term but not in the way generally understood. The problem is not with the technology itself but with Western governments providing substantial subsidies to grossly inefficient forms of biofuel production. As a result the shortages created by biofuel demand need only be temporary.

The fundamental problem with food supply is low yields in sub-Saharan Africa and developing Asia. American yields are, on average, 10 times African levels and three times Asian levels. Yet if the developing world had access to the modern agricultural technology and economic infrastructure enjoyed in the West its yields could increase enormously. Other modern techniques, such as biotechnology, could bolster productivity still further. These have the advantage of being able to build such qualities as resistance to drought, pests and salt water into crops. They can also enhance the food value of agricultural produce.

In any case the spike in food prices cannot be explained in terms of long-term trends alone. Food prices have increased by 45% since the end of 2006 – hugely more than the increase in food consumption in developing countries over the same period.

It seems likely that short-term factors have played a key role in pushing up food prices over the recent period. These include a financial bubble as investors, nervous about market developments elsewhere, seek to make money from investing in agriculture. In this sense there is a resemblance between the surge in food prices and earlier bubbles in technology and housing.

Rising food prices should not be blamed on improving diets in developing countries.