Extreme Food Price Volatility Is Here To Stay

In the future, much of the energy I used to devote to oil prices will be devoted to food prices. Both markets exhibit large price volatility which didn't used to exist, but there is a crucial difference. I am not aware of large numbers of people dying because they couldn't afford to buy oil products (yet). When oil prices spike, demand adjusts accordingly (goes down). When food prices spike, people living on the edge (aka. poor people) die. To use the language of economists, and you know we love economists here at DOTE, basic food stuffs have a very low price elasticity of demand among the world's poor. This is a fancy way of saying you starve to death if you don't eat.

We note with some alarm the FAO's food price index.

Just like oil prices. Everyone pays nominal prices for food (orange line) unless your income increased to match inflation. In this latter, rare case, you actually pay real prices (yellow line).

2013 promises to be another very "exciting" year for food prices due to the various droughts the world experienced this year. The mainstream media is out in force on this one. Here's  Why 2013 will be a year of crisis  by CNN contributor David Frum (hat tip, reader Ben).

Prediction: 2013 will be a year of serious global crisis. That crisis is predictable, and in fact has already begun. It will inescapably confront the next president of the United States...

[My note: People like Frum can't imagine discussing anything without dragging American politics into it.]

The crisis originates in this summer's extreme weather. Almost 80% of the continental United States experienced drought conditions. Russia and Australia experienced drought as well.

The drought has ruined key crops. The corn harvest is expected to drop to the lowest level since 1995. In just July, prices for corn and wheat jumped about 25% each, prices for soybeans about 17%.

These higher grain prices will flow through to higher food prices. For consumers in developed countries, higher food prices are a burden — but in almost all cases, a manageable burden.

Americans spend only about 10% of their after-tax incomes on food of all kinds, including restaurant meals and prepackaged foods. Surveys for Gallup find that the typical American family is spending one-third less on food today, adjusting for inflation, than in 1969.

But step outside the developed world, and the price of food suddenly becomes the single most important fact of human economic life. In poor countries, people typically spend half their incomes on food — and by "food," they mean first and foremost bread.

When grain prices spiked in 2007-2008, bread riots shook 30 countries across the developing world, from Haiti to Bangladesh, according to the Financial Times. A drought in Russia in 2010 forced suspension of Russian grain exports that year and set in motion the so-called Arab spring.

Hungry people tend to riot and revolt. That is Frum's main concern.

The Arab Spring of 2011 is sometimes compared to the revolutions of 1848. That's apter than people realize: the "hungry '40s" were years of bad harvests across Europe. Hungry people are angry people, and angry people bring governments down.

Will 2013 bring us social turmoil in Brazil, strikes in China or revolution in Pakistan? The answer can probably be read in the price indexes of the commodities exchanges — and it is anything but reassuring.

The most remarkable thing about Frum's article is that the phrases "climate change" and "global warming" do not appear in it. That's a serious omission. Oxfam has issued a new report on the climate impacts on food prices called Extreme Weather, Extreme Prices. I will be posting about it in the near future.

Your take-home message today says that extreme food price volatility is here to stay. We will not have severe droughts (at least in the United States) every year, but these events will occur more frequently as time goes on. That's the main source of extreme volatility, not only here, but everywhere else in the world. The FAO's chart (above) speaks volumes. People will starve. Shit will happen.

The happy world of stable food prices you older folks remember is gone forever.

Bonus Video — check this out, the VOA Special English Agriculture Report. This is great

 

Comments

[PBD]

Errrr - Dave .... I don't think it's remarkable at all that David Frum's article failed to mention Climate Change, etc.

You DO know that this is the same David Frum - neo-con extraordinaire - that gave birth to the phrase "Axis of Evil" when he was George Bush's speechwriter?

And co-author, with the “Prince of Darkness” himself - Richard Perle - of "An End to Evil: How to Win the War on Terror".

I don't care how much this demon-spawn of Canadian journalist Barbara Frum has "re-invented" himself ( http://original.antiwar.com/justin/2012/08/16/the-reinvention-of-david-frum ) - he must be up to something by lamenting the starving poor of the world - but it can't be anything good in my view.

[Dave Cohen]

@PBD

No, I had never heard of David Frum. And of course I was being a bit sarcastic when I said "that's a serious omission" regarding his not mentioning global warming.

People may think I keep up with these assholes, but I don't.

Thanks for the background on yet another soulless child of the devil.

-- Dave

[gretchen]

Living in Hawaii pushes to the forefront the interconnection between higher oil prices and food. Perhaps people will want to believe that climate change will affect weather will affect food costs and make that the reason for higher prices and scarcity, but I don't believe it. We have food stores from record crops in the last few years which should ameliorate any problems in crop production this year due to weather. It's the high cost of fuel causing fewer shipments that is causing high food prices and scarcity .
This article is from 2008 and food prices are much worse now. http://money.cnn.com/2008/06/18/news/economy/Lawrrence_Hawaii_shipping/index.htm
info regarding record crops in 2010 and 2011 http://www.nass.usda.gov/Newsroom/2011/01_12_2011.asp

[Dave Cohen]

@gretchen

I will be posting about the correlation between food prices and oil prices at some point in the future.

However, since oil prices are phony--artificially high--and higher oil prices cause transport costs to rise, and that inflation drives food prices as well, the issue is not as simple as it may appear on the surface. And there is also speculation in the food markets similar to that we find in the oil markets.

Here's a good place to start (Bloomberg, August 24, 2012)

http://www.bloomberg.com/news/2012-08-24/fuel-costs-plus-u-s-drought-equals-higher-food-prices.html

-- Dave

[Ben]

@Dave

Thank you for covering this story Dave.

Re: the issue is not as simple as it may appear on the surface

I've been trying understand exactly how all of this works for a while now ... with little success.

[Capt. Bat Guano]

Dave, how about a global action to remove food from the commodities/speculative market. I guess the assholes that make their parasitic livings from speculation would fight this but you would like to think that they may develop some thing resembling a touch of empathy on this sole issue.

[Wheelerlucas]

How about that I live in Hawaii to. A UH student friend of mine sent a very interesting post from www.thinkprogress.org. It is a summary of "Uber-hedge fund manager" Jeremy Grantham latest report entitled "Welcome to Dystopia! Entering a Long-term and Politically Dangerous Food Crisis". http://thinkprogress.org/climate/2012/08/16/681571/jeremy-grantham-on-welcome-to-dystopia-we-are-entering-a-long-term-and-politically-dangerous-food-crisis/. If you go to the post you will find that Grantham sees the global food situation as developing along the same lines that you do Dave.

Read some of the responses to the post and you will find a number of them are quite stupid -- fine examples of "progressive conspiracy theorizing". They are filled with talk of Bildibergers and their evil "Malthusian agenda".

This is my first response. I hope it is positive contribution to the discussion. Dave you have made the right decision about where to focus your energy!

[Ben]

@PBD

I don't want to speak too much about David Frum, however, I want to make you aware of something: Frum didn't "birth" the phrase the Axis of Evil; Frum recycled WW2 era Allied propaganda (e.g. the Axis alliance, Axis nations, Axis countries) and adapted it to, then applied it to Iran, Iraq, and North Korea.

[TulsaTime]

Dave- Excellent observations on the role of food in the 'modern' world. I was in college when the Rome study came out, and it sparked a vigorous exchange about whether population or ag science would win in the long run. We are in the overshoot area where if science flags, or natural processes go bad, famine will be taking off. Do you suppose reproduction overwhelms science by being more brain stem than forebrain?

[Mike Roberts]

Gretchen, I understand grain stocks are at a long term low, despite the record harvests of the last couple of years in the US. For example, see http://www.fwi.co.uk/Articles/31/08/2012/134844/Grain-stocks-at-12-year-low-at-end-of-201112-cereal.htm

[PBD]

@Ben - I'm not sure of the significance of your point, Ben.

I assume that pretty much everyone with at least an "armchair" understanding of 20th Century history (which is certainly all I would claim for myself!)is aware of the terms 'Allied Powers" and "Axis Powers" in connection to WW II.

But my understanding of recent "pop culture" (or whatever you'd call it) with respect to the specific phrase "Axis of Evil" is pretty much as I characterized it. ( http://en.wikipedia.org/wiki/Axis_of_evil )

I have always presumed that a potent aspect of the propaganda value of that specific phrase is indeed the echoes of WW II, Hitler, Nazism, etc. that it connotes.

In any event, to me it seems a rather minor aspect of the overall drift of my comments, which was to suggest that one explanation for the absence of any references to Climate Change, etc. in his CNN piece was because, as a (former?) "neo-conservative", he would presumably be adverse to acknowledging the concept, which I would suspect would be anathema to his political outlook.