Bill Emmott - International Author & Adviser

Article

How to tackle food-price inflation
Corriere della Sera - March 8th 2008

Throughout your lifetime, whether you are 25, 40 or (like me) 50 years old, the price of food has been falling, bit by bit, year by year. The only exception to that trend occurred briefly in 1974-75 when the oil shock sent fertiliser prices rocketing and supply shortages made food prices rocket too. But we are now in another more dramatically exceptional period, one which is affecting consumers all over the world, is making the UN’s food-aid programme more costly, and is making life much harder for central bankers concerned about controlling inflation. The difficult question is: how long will this exceptional period last? The difficult answer is that it depends on our attitudes to science.

            In dollar terms, the food-price index published by my former employer, The Economist, has risen by more than 60% in the past year, or a bit less in euros. In the past, sudden rises in the price of food have generally been caused either by bad harvests or by a factor such as war which breaks up the global supply system. Neither of those explanations is relevant this time. The global crop of cereals last year was an all-time record of 1.66 billion tonnes, about 5.5% higher than in 2006. Instead, the rise in food prices has two main causes.

             The first is that demand for grains in China, and to a lesser extent India as well as other newly emerging economies, has itself risen rapidly as a wealthier population starts to eat more meat, which requires more and more grain as animal feed. But that should cause a gradual rise, not a sudden one. The second reason explains the suddenness: it is that oil prices at $100 a barrel, together with a flood of subsidies especially in the United States, have caused a big rise in demand for maize to be converted into ethanol for use as a substitute for gasoline. America expanded its ethanol subsidy programme in 2005, encouraging lots of farmers to switch to maize from other crops.

The first of those factors is likely to continue. High food prices may slow down the rise in demand for meat in China and India but will not reverse it altogether. The second factor depends on political decisions about ethanol subsidies and on whether oil prices themselves stay high, encouraging more motorists to switch to ethanol for their cars. In a presidential election year in America, no candidate is going to promise to hurt farmers by cutting ethanol subsidies. And, as half a century of history of Europe’s Common Agricultural Policy and of the American and Japanese farm-support programmes shows, subsidies can be raised quickly but will always take a long time to be reduced.

Instead, the duration of this period of rising food prices is likelier to depend on three sorts of action. The first is by farmers themselves. In response to high prices, they are planting more crops than ever before. The weather will determine how successful those farmers are in turning their plantings into bigger harvests, but with plantings increasing in many countries the overall supply of food is sure to rise.

The second type of action will take longer. It is that governments and private investors need to devote more money to building infrastructure in rural areas in the world’s poorest countries. That is where the biggest potential for increasing the amount of land devoted to farming exists. But India shows the problem: it is one of the countries where demand for meat is increasing, but its farmers are barely benefiting. The reason is that their crops cannot get to market, because of poor roads, and their other produce rots or spoils thanks to a lack of refrigeration and secure warehousing. The farmers are there, the land is there, but the food is not reaching the market. Political opposition to allowing modern retailing is one problem. Misdirected aid and a lack of public funds for infrastructure is another.

The third action holds an even more dramatic potential, but depends largely on public opinion. In the past, farmers have achieved bigger harvests by using new technology, especially better seeds, insecticides and fertiliser. A technology is emerging that could produce huge increases in crop yields while using less insecticide and fertiliser: it is genetic engineering. But public fears about genetic science and food safety, most strongly in Europe, have persuaded governments to slow down research and development of genetically modified crops, all over the world.

The best response to food-price inflation would be to relax those barriers to innovation in farming that are represented by genetic modification. This would require a new public debate and new efforts by scientists to persuade us that GM foods are safe, which would take time. But it could have a big effect over, say, a five-year period. The choice is stark: pay higher prices, or let the innovation begin.

 


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