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.
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.