Food prices

“When you start getting wealth, you start demanding better nutrition and better food, and so demand is high, and that causes the price to go up.” That’s what George W Bush said in a press conference on May 2nd. The NY Times reports:

In response to the president’s remarks, a ranking official in the commerce ministry, Jairam Ramesh, told the Press Trust of India, “George Bush has never been known for his knowledge of economics,” and the remarks proved again how “comprehensively wrong” he is.

I agree that GWB is not the sharpest knife in the drawer. But even a dull knife would do if all you are doing is spreading softened butter. Nothing that GWB said in this instance is contrary to reason or reality. Prices do move when demand and/or supply shift. Indeed, a change in price conveys absolutely essential information. Consumers get the signal that they have to make some changes in their demand pattern, and producers learn that they have to make changes in what they produce and how much.

The fact is that world demand for agricultural output has gone up. There are more people eating higher up on the food chain, and there are more uses for agricultural output such as for corn-based ethanol. If the supply does not expand sufficiently, the natural outcome is a rise in food prices. Apportioning blame for the rise in prices may make good political posturing but in the end it is pointless. It is like asking which straw broke the camel’s back: the last straw is as much to blame as the rest of it.

Once again, I am struck by the hypocrisy of the people decrying the rise in food prices. Bush (and people in the rich parts of the world) do consume a lot more than what would be considered their fair share if food were absolutely equally shared across the world. But why just stop at food? The rich do consume everything in above average quantities. So what else is new?

Indeed, you don’t even have to go all the way to the US to see that the rich have more of everything. Mr Kamal Nath, the commerce minister of India, surely consumes more of everything compared to the average Indian. So his (and other rich Indians’) outrage at Bush’s statement is also hypocritical. They should immediately reduce their own demand for goods and services to the average level in India and only then will they have to leg to stand on when complaining about Bush.

Here’s a bit from a World Bank site that sums up the causes of the food price hike:

While headline news about high food prices is a relatively recent phenomenon, the broader upswing in commodity prices began in 2001. Large structural shifts in the global economy—including growing demand in China and India—have been steadily reflected in commodity price increases, especially of metals and energy.

Food prices have increased in response to many factors: higher energy and fertilizer prices; increased demand for biofuels, especially in the U.S. and the European Union; and droughts in Australia and other countries. World grain stocks are at record lows and next year’s prices depend on the success of the next harvest in the northern hemisphere.

Wheat prices (US$) have increased by 200 percent, and overall food prices (US$) have risen by 75 percent since the turn of the century. Adjusting for exchange rates and domestic inflation reduces the price increases faced by developing countries—but these increases are still severe for millions of poor consumers.

“The increases in grain prices are not caused by short-term supply disruptions, as is the normal case, and it will likely take several years for supplies to increase to rebuild stocks and allow prices to fall,” said Don Mitchell, Lead Economist in the World Bank’s Development Prospects Group.

There is no arguing with the fact that India and China are large economies. Large economies can (and do) affect world prices. Saying that increased demand in large countries pushes up prices is not a moral statement. It is of course easy to take the moral high ground and tell the rich (countries or people) to consume less. But preaching to others exposes one to the danger of being preached to. The rich could turn around and say, “Why don’t you consider lowering your population? It is because there is an imbalance between the number of people you have and your ability to provide for them that causes poverty. You made your bed and so shut up and go lie in it. If you had any brains, you would have recognized decades ago that given the resources at your disposal, unrestrained population growth would the predictable consequence of a lot of hungry people.”

All this is not quantum mechanics. Years ago I had come to the conclusion that there is a very compelling reason why the rich do not have an incentive to see the poor becoming prosperous in a world with natural resource limits. Then simple logic pushed me to conclude that the rich nations would not like population reduction in the poor nations. A large population of very poor people uses less resources on aggregate than a much smaller population of very rich people.

So what is going to happen? Supply will respond to the increased demand but that response will be sluggish. That’s what markets do. But it is possible to mess with the market and make a bad situation worse by fixing prices and so on. It is absolutely predictable and certain that governments will try to stop the market from functioning. The governments will transform a minor tragedy into a major catastrophe. That’s just the way it is.