Today, Clark and Gardner discuss increasing food prices. Previously, they whether global trends in overall supply and demand portend a coming era of scarcity. Later in the week, they’ll discuss the emergence of China and India as major resource consumers, government policies aimed at altering consumption habits and more.
A minor inconvenience for Americans
By Gregory Clark
Undoubtedly, the crazed policy of producing ethanol from Midwest corn -- a policy that saves little fossil fuel because so much oil is used in growing and converting corn to ethanol - contributes to high food prices; so have greater demands from strong income growth in China and India. But much of the recent price spike may be transitory.
For U.S. consumers, high food prices are a minor inconvenience; we should actually welcome them. Despite the alarmism and wild runs on 20-pound bags of rice at Costco, higher prices are good.
While a catastrophe for the poor of Africa, high food prices are a mere inconvenience for us because we are so rich. As people get richer, the share of their income devoted to the raw materials in food -- as opposed to the preparation and serving of that food by supermarkets and restaurants -- declines to a tiny fraction. The raw materials for food (the amount paid to growers) account for 1.4% of all U.S. purchases. Food prices at the farm double -- so what? Our incomes decline 1.4%.
Much more pressing for many Americans is the subprime mortgage crisis and the attendant financial losses on the real estate market. Housing prices nationwide have declined in real terms by 15% since their peak in 2006. That represents a loss of $2.7 trillion in wealth, or about $9,000 per American. Rice costing $1.30 a pound is trivial compared to this upheaval of many lives.
Hunger is simply not a problem in modern America. What’s really more concerning is over-nutrition: Americans are the world’s heaviest people. We function badly in a world where calories are so cheap. Because the raw materials of our food supply are so inexpensive, it costs little extra for restaurants to supersize everything. Put giant amounts of food in front of people, and they will eat it. American cooking substitutes quantity for quality, industrial fats for flavor.
If it is good to tax alcohol and tobacco to reduce consumption, then we should have a policy of high food prices. But the myth of under-nutrition among poor Americans -- who are more likely to be overweight than the rich -- means that food is not taxed, it is subsidized instead. Heavier taxation in the European Union has yielded much better health for Europeans.
For the poorest nations, however, the rise in food prices is a catastrophe. Despite the fact that many countries still have most of their population in agriculture, they have such low farm productivity that they import much of their food supply. With basic foods making up more than half the expenditures of families in poorer countries, the doubling of prices puts a substantial strain on the incomes of the world’s poorest. Thus the food riots in Haiti, Somalia and Yemen.
But the problem in these societies is not expensive food per se; it is their failure to experience the economic growth that would raise incomes and make food prices unimportant. Shipping subsidized food to these countries will not solve that long-term problem.
Gregory Clark is chairman of the economics department at UC Davis. His recent book is “A Farewell to Alms: A Brief Economic History of the World.”
Preventing a long-term food shortage
By Gary Gardner
We agree that ethanol is one of the drivers of high food prices. With ethanol claiming 20% of the U.S. corn crop in 2006 -- up from 6% in 2000 -- there is little doubt that fuel is squeezing out some of our food supply. But I am not as sanguine as you that the current price spike will be transitory. Several forces are converging to make food supply a greater challenge in the future.
First, demand from prosperous developing countries is likely to surge. Incomes are rising fast in China, where economic growth has hovered around 10% annually for well over a decade. Among the poor, this usually means greater demand for meat, milk, cheese and other livestock products, all of which are grain-intensive. And while China gets all the attention for rapid economic growth, it is not alone: The economies of 27 countries grew at 8% or better in 2007, and 47 grew by at least 7%, virtually all developing countries with sizable numbers of poor people. They too want more variety and taste in their diets.
Second, our ability to meet future demand may be constrained, especially by water scarcity. Water tables are falling from over-pumping in some of the world’s major agricultural regions, including northern China, the Punjab in India and the Great Plains of the United States. Already, over-pumped ground water is blamed for the decline in irrigated areas in India’s Tamil Nadu state and for the decline in wheat production in northern China. The problem could soon explode onto the world stage because many countries, especially in the Middle East and north Africa, have disguised their water deficits by importing large shares of their grain. If grain is less abundant on world markets -- already some Asian nations are restricting rice exports -- where will the heavy importers turn?
There is one large reservoir of food that could help the world through scarcity in the future: the crops fed to livestock. According to University of Manitoba professor Vaclav Smil, about half of the global corn crop and up to 80% of the global soybean crop are fed to cattle, pigs and chickens. These animals are literally piggy banks of grain and soy. So the less meat we consume, the more grain will be available to us (a disproportionate amount, because it takes many pounds of feed to make a pound of meat). If a real supply squeeze occurs, this would be an easy place to find more food.
I agree with you, Greg, that high food prices can be desirable -- sometimes. Higher prices would help us place more value on our food, reduce obesity and raise the incomes of poor farmers in developing countries -- but only if the price increases are structured intelligently. I love the proposal by Yale professor Kelly Brownell to institute a “Twinkie tax,” a levy on calorie-dense, nutrient-poor foods. Twinkies would be taxed heavily; fruits and vegetables, not at all. In fact, the revenue from low-nutrition foods could be used to subsidize good foods, ensuring that even the poorest among us have access to good diets.
Supply challenges ahead? Yes. But smart policies can meet those challenges -- and help the world’s people to be better off.
Gary Gardner is a senior researcher at the Worldwatch Institute, where he is also co-director of the report, “2008 State of the World: Innovations for a Global Economy.”
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