Food Shock

http://www.financialsense.com/fsu/ed...2008/0509.html
 

by Jennifer Barry, GlobalAssetStrategist. com May 9, 2008

As an American, I ve taken for granted that I can get just about any food I want at the supermarket. In fact, the number of choices are dizzying. I never really thought about the tenuous chain between myself and my food. Less than 1% of the U. S. population is employed in agriculture, and 40% of these farmers are 55 or older. 1 The chain of transportation that brings goods to the stores is tenuous and depends on a few key railways and truck drivers. Supermarkets could experience spot shortages if the proposed trucker strike gains momentum or more drivers quit the business.

Rich countries like the U. S. used to store extra food in case of emergencies. Many grain elevators were built in the Great Plains after World War II for this purpose. 2 This stockpile reduced the volatility of food prices. When prices rose, the government released some grain into the market. When costs were low, the Department of Agriculture would support prices by purchasing surpluses. Excesses of wheat, milk, and butter were exported, given away or even destroyed for lack of demand. After the passage of the 1985 farm bill, the USDA divested itself of grain stocks and other foodstuffs.

What happens in the U. S. agricultural markets has a great impact on the rest of the world. America is the Saudi Arabia of grain as it is the largest exporter. The U. S. supplies 70% of the world s corn, and it has little 2007 crop surplus of soybeans and wheat left to sell. 3 Many poor countries depend on imports of these staples to feed millions of their hungry citizens.

Another major cereal exporter, Australia is just starting to lift out of a drought that started in 2002.4 They lost most of the winter wheat crop and their main breadbasket, the Murray-Darling Basin is still excessively dry. Officials hope that the La Ni a weather pattern will lead to bumper crops this fall. However, the La Ni a that should bring rain to Australia and India will likely deny it to the U. S. agricultural heartland, as well as parts of Brazil and Argentina. 5

With increasing world demand and poor weather in the Southern Hemisphere, the margin for error has become very thin. This year, global wheat supplies are projected to hit a 60-year low, and barley will plunge to a 42-year low. Corn stocks are expected to drop to the lowest level since 1984. Global grain supplies are down to 50 days, less than half the amount just 8 years ago. 6

Another pressure on cereals is the increased global consumption of meat and dairy products. Asians were mostly vegetarian a half century ago, but today they can afford more animal protein. Increased demand for meat puts upward pressure on grain prices, as livestock consume large quantities of feed. Many pounds of grain are necessary to produce each pound of meat.

While China has approximately 25% of the world s population, it only has 10% of its arable land, making it vulnerable to food shortages. More land is turning into desert every year from climate change and poor soil management practices. Ground water is being depleted at a frightening rate, and China will likely have to import water in the form of grain. China isn t expected to export any corn this year, and may become an importer. Half the world s soybean crop is now consumed by China, and a small 2007 harvest has left stocks low. 7 Asian crises like bird flu and the current pig disease further deplete food supplies. 8

Another threat to the food supply is a mysterious disorder killing honeybees called Colony Collapse Disorder, or CCD. Even before this threat, bee populations shrunk 50% from their peak in the 1970s. Bees are essential to pollinate many commercial crops we take for granted. 9 About one third of fruits and vegetables produced in the U. S. depend on insect pollination.

Worker bees are suddenly disappearing and abandoning their hives, and some keepers have suffered a 90% loss of their insects. Even more odd, bee predators like the wax moth won t touch the unguarded hive. Theories range from stress to mites, fungus, pesticides, genetically modified crop poisoning and even abnormally large honeycombs, but no one knows for certain. Now another pollinator, bats are dying in a similarly baffling way in the Northeast U. S.

Much of the world s food supply is not eaten, but converted into biofuels. Even coffee beans are being harvested as an energy source. The EU has mandated that 10% of car fuels should be from biological sources by 2020, a target that will lead to much higher food prices.

Last year, 24% of the U. S. corn crop was used to produce ethanol. 10 In America, ethanol production is subsidized which pushes up the price of corn. At the same time, taxes are levied on foreign sugar ethanol to support domestic sugar growers. About 20% of the U. S. soy oil production is used for biodiesel.

However, this biofuel production is a drop in the bucket of gasoline demand. Even if all the grains harvested in America were converted to fuel, only 16% of the automobile needs would be met. Peasants in the developing nations may be forced off productive cropland so that governments may produce more profitable and nonedible biofuels for export to the energy thirsty West.

The world can t increase supply of food or biofuels easily. Global arable land has reached a plateau at 3.7 million acres. Prime farmland is still being purchased for housing developments decreasing acreage for planting. In suburbs across the United States, former farms are now growing condos and big box stores. Without more acreage under cultivation, "we go to a religion-based energy policy -- pray for good weather," remarked Monte Shaw, head of the Iowa Renewable Fuels Association. 11

All this excess demand has caused rapid increases in food prices, putting the poor in grave danger. Wheat, barley, and oats have more than doubled over the past year. The poorest individuals already spend 80% of their income on food, and they can t afford the price hike. There are nearly 900 million hungry people in the world with the population growing every year.

Jacques Diouf, head of the UN s Food and Agriculture Organisation warned of serious social unrest if food prices continue to skyrocket. In Argentina, farmers are currently on strike to protest the high export taxes on their soybean crop, while Italians protested the high price of pasta with a one day boycott last year. 12 In 2007, there was a huge protest in Mexico City as the price of corn jumped by more than 400%.13 Food riots have also occurred in West Bengal, Burkina Faso, Yemen and Uzbekistan.

Nations feel pressure to control prices that are spiraling out of control, and keep their citizens from going hungry. Russia, Argentina and the Ukraine decided to restrict wheat exports to ease the pressure on the price of bread. Kazakhstan has a four month moratorium on exports. 14 Vietnam, Cambodia and Egypt have reduced their foreign rice sales, while India and Bangladesh banned exports of most types of rice. The devastating cyclone that recently hit Myanmar has only increased anxiety about the supply of staple foods.

Some experts hope that technology will be able to solve the food crisis. In the past the green revolution was a great success, enabling the world to feed more people on less land using hybrid crops, irrigation, fertilizer, and pesticides. In fact, this was really a petroleum revolution. Cheap energy allowed farmers to fuel tractors and other machinery that raised productivity. Globalization and low transport costs allowed farmers to find markets at the opposite end of the globe, allowing consumers to eat apples in May and strawberries in December. Fertilizers made from natural gas allowed food to grow in depleted, even sterile soil. Commercial pesticides are also produced from petrochemicals. 15 Oil is imbedded in every calorie we eat, and the surging price of petroleum will only accelerate food price inflation.

Many countries like to blame speculators for the price rise in foodstuffs. India has taken the extreme step of stopping trading in some commodities like potatoes and soy oil for at least four months, even though last year's ban in rice and wheat futures had no discernable effect. 16 These actions distract from the real cause of inflation, the debasement of their currency.

If you look at the price of a staple food like corn, the price was severely depressed. U. S. farmers were getting no more in nominal terms for their crop in 2005 than they did in 1994. Meanwhile, official CPI had increased by a third.

The bull market in foodstuffs is driven by real fundamentals. Prices are high because stockpiles are depleted, and forecasts for production in many commodities are poor. Prime farmland has been turned into subdivisions and big box stores. Pollinators are dying while the global population explodes. Food is being burned in gas tanks instead of eaten, eroding the margin of safety. The manufacture of biofuels also uses up part of the rapidly dwindling petroleum reserves.

Food is not a luxury and demand will not be significantly depressed by rising prices or punishing speculators. These higher food costs are not going away. In fact, I expect that food will take an ever increasing bite out of your budget, as governments competitively debase their currencies. News of shortages only exacerbate the problem as individual consumers stock up. While the Federal Reserve disparages this inflationary psychology, I think buying some extra non-perishable food is a wise idea.

Sources:

http://www.epa.gov/oecaagct/ag101/demographics.html

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http://www.news.com.au/couriermail/s...87-953,00.html

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http://www.leopold.iastate.edu/pubs/...ter/energy.htm

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