The Food CrisisApril 23rd, 2008
by Rohit Kapuria - Resident Economist
Last week Thursday, I went on my tri-weekly visit to the bagel shop a few blocks from my apartment and placed the same order I always do costing me $4.50. Two days later, I placed the same order and pulled out exact change in anticipation of payment. The cashier took the money but instead of giving me my receipt, he just sort of stood there and gave me a sheepish smile. Not really knowing how to respond, I returned same and for about six seconds, we both just stood there giving each other, well, sheepish smiles. Finally I was spared any further suspense when to my horror, he pointed at the cash register’s monitor which displayed – gasp – my cost was $6.75!!! Imagine my indignation – I mean how the heck had the price risen by 50% in two days?!!
In my last blog – State of the economy – it affects us all – I discussed the economic downturn (recession – in technical terms yes, but a larger discussion is required on this subject) largely stemming from the tomfoolery associated with the credit market before it became a crisis. This time however, following alongside several economists and global finance ministers, evidence shows that food shortages and the corresponding skyrocketing prices are much heavier contributors to economic and political instability than even the credit crisis.
Issues related to malnutrition in developing African nations have longed been featured in the media, wherein the consumer is limited to only one or two staple items. The repetitive intake of said items without the addition of the often expensive and thus elusive protein rich foods have been till date primary causes of malnutrition.
Yet, this issue in its current state pushes far to the right of the graph as concern has shifted from simply malnutrition to the complete lack thereof the food staples themselves. As these basic items ride a silent tsunami wave of food price inflation, the resulting effects have sparked riots in Haiti, Bangladesh and Egypt and left many governments shaken with fear as they brace for mass starvation across their respective citizenry.
Despite the US being largely insulated from the effects of the global food crisis, the pinch is starting to push past the wall. Scaling down to the bottom of the income quintile in the US, one would find that the average person/household spends roughly 16 percent of their income on food as compared with many other countries where as much as 50 percent is spent on same. In my home country of Nigeria, this figure is closer to 72 percent. Even the relatively wealthy class of Americans are dismayed when they venture to Whole Foods and discover that a loaf of bread is selling for $4.50, a gallon of organic milk for $7 and a pound of wild salmon nearing $28. Call it sticker shock as did the New York Times or call it food price inflation, the fact of the matter is the crisis is bounding over the fence that sets apart America from the rest of the world full force.
On a macro level if we examine the topic, we are advised that approximately 1 billion people live on $1 a day. Now take into account the declining value of this dollar along with the upswing in prices of rice – up 50 percent in the last year – wheat – up 74 percent – and corn – which during its rally has flirted with base increases as high as 68 percent. Certainly the Penn effect will obscure some of the convergences in prices of luxury goods or foods which are far removed from the developed and developing worlds, as one attempts to paint the economic picture of food inflation via nominal currency terms. However, without visiting issues relating to the purchasing power parity dynamics then on staple grain items, and simply by examining the consumer price index, we can easily see that such inflationary pulls on the prices will take a larger part of the income just for basic food consumption than previously.
What is it then? Are we simply looking at a lackluster supply end in the production of these staples? The reasons are multifaceted as some blame is to be placed on bad policy with long term trend effects, some on misplaced ambition and some on reckless solutions to fix previously broken moves.
It’s hard not to notice that fuel almost hit $120 today which would make it the highest its ever been in nominal terms, though this really isn’t as expensive as it seems when we adjust for inflation, PPI (Producer Price Index), income growth and the drain on the average car owner’s disposable income (averaged out across incomes nation-wide). There are supply concerns which drive up the prices but there is also the effect of the falling dollar which makes oil more expensive. Essentially, oil prices are denominated in dollar terms and so when compared against the countries with stronger currencies, these oil prices are having a smaller effect in those countries than they are domestically in the US. There is hope though that as the Federal Reserve starts to ease interest rate cuts (again we hope) and the European Central Banks begin their easing theirs (we hope), there will be an upward push against the current downward pressure due to the trade deficit and interest rate differences with other developed nations.
Alongside this conjecture, there is suspicion riding against the hedge funds and other large investors such as pension funds as the volume of trading along the commodity vehicles have increased in the recent months with speculative factors pushing for higher returns on investment. Criticism has been leveled regarding the prices of some commodities which are being priced higher than supply and demand factors would normally dictate. It may be the case that speculative interest is hurting some part of the markets, but evenso, the effects wouldn’t be that great. And so any attempts then to curb such trading and place full force restrictions and/or quotas as have been proposed should be avoided. From a libertarian perspective, a push for further market liberalization in an attempt to re-establish the equilibrium should be followed as opposed to making attempts to artificially force a new equilibrium point onto the market.
Another factor which is positive in many respects as it pertains to economic growth is introduced with the higher demand from the rising middle class population in China and India for grain and protein rich foods such as meat; the latter commodity requiring the former commodity to feed respective producers i.e. cattle stock. Therefore, with increased demand for such commodities, there is then a battle with the pre-existing population which has consumed said items up until now but whose production has either declined or remained static. A further compounding factor which is associated with this increased demand is related to issues of global warming and bad weather. Droughts are not particularly conducive to generous harvest seasons.
Then there is the issue which is really raising the ire of developing nations as Congress last year mandated a fivefold increase in the production and use of biofuels. By subsidizing and thereby motivating conversion of corn, sugar cane and other food products into substitutes for oil, critics argue that such shifts are helping to drive up prices. The Earth Policy Institute just last week pointed out that “the amount of grain needed to produce enough bio-ethanol to fill the 25-gallon fuel tank of a sport utility vehicle (SUV) tank could feed one person for a full year.” And so utilizing land for the biofuel purposes will take away from land that could have provided food. Even as the US defends its decision and proponents argue that the effect on the food crisis is miniscule and rests only around 15%, the finger pointing continues and debates are getting heated.
Nevertheless, rising prices of such commodities have boosted inflationary fears and severely crimped the average consumer’s discretionary spending – put into an elementary macroeconomic perspective, we want the consumer to spend during a recession, hence the Fed’s push to lower interest rates. But the consumer doesn’t have enough money left to spend.
Taking a look at the longer lines of guests outside St. Anthony Foundation’s Dining Room early in the month, it is obvious that the general assistance checks – that were very little to begin with as they usually cap at $56 but with the figure being somewhat variable i.e. plus or minus a few dollars depending on the individual’s housing status – which they receive the first of the month isn’t taking them as far as it previously did. Well, it never really took them anywhere in the first place, I mean, a handful of meals from McDonald’s if possible, but mostly the use is restricted to pay for transportation to and from human service programs like St. Anthony’s. Further compounding the problem is the closing down of yet another food service program – the Haight Ashbury Food Program this month – because of the marked decline in monetary support and grants. There are then even fewer options left for our guests.
It should be noted that whatever the reasons are, even if we desire higher output in response to higher demand, we cannot simply expect an immediate increase in output as production is still sticky downward i.e. variable movement resulting from change in pressure is fundamentally resistant to rearrangement in the short term. Basically, reaping the rewards of harvest from increased planting is a long term prospect – econometrically speaking, there is a lag effect to take into account.
No longer are we all shielded from the effects and ubiquitous nature of the food crisis. A new equilibrium will be established as the farmers gradually respond by growing more crops, however the days when we could rely on cheap food will remain a thing of the past and the lines at St. Anthony’s promise to keep getting longer.