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The future of world food prices

Prof. Chris Ritson
Food Ethics Council member Chris Ritson looks at the ticking time bomb of food price instability
The future of world food prices



This is a revised and extended version of a presentation Chris Ritson gave at the York Festival of Ideas on June 15th.

It struck me that the title of this session “The Future of Food: A ticking time-bomb” seemed to be  inviting the speakers  to gaze into a global crystal ball, and I decided to look at world food prices, having spent much  of my academic career trying to understand the forces determining movements in agricultural commodity and food prices.

An odd feature of world food prices in that they always seem to be either “too high” or “too low”. The reason for this is the paradox that, although in the supermarket for example, consumers appear to be extremely price sensitive- this is about different brands, or versions of products, or choice of shop. When it comes to major food product categories, consumers throughout the world are incredibly inflexible in the amount they buy in the face of price movements, particularly as can happen, if most food prices move together.

I characterise the evolution of world food prices as a kind of battle between increase in demand – driven by population growth and rising incomes; and increase in supply fuelled by technological advance and publically funded investment. If either outpaces the other - even by a relatively small amount - then inflexible demand can lead world food prices to explode to a ceiling, or collapse to a floor. So it is not just short term shocks that cause sudden and substantial movements in international food prices; price volatility can result from imbalance between the longer term factors underlying the development of world food prices.

What we have could be described as tramlines – set far apart, with the potential for prices to move rapidly from one to the other. For most of the past 60 or so years prices have tended to bump along at the bottom supported by government policies and poor returns to farming– supply has tended to outstrip demand –  but with two significant exceptions.

The first occurred in the mid -1970s in a period then dubbed ‘the world food crisis’; the second began in 2007.  In the 1970s prices soon came down as far as, and as fast as, they had gone up, leading to the phrase ‘price spike’ being coined to describe this kind of event.  

I have now looked more carefully at what has been happening recently by studying the FAO monthly world food price index. (This is a composite of five major agricultural commodity indexes –meat, dairy products, cereals, vegetable oils and sugar – with   average 2002 -2004 = 100.)

Between 1990 and 1994 the index meandered between 100 and 110. Prices then gently rose to reach a high of 138 in mid-1996 and then progressively declined to hit a low of around 90 in early 2000.  The index then hovered around this level for the next three years, before gradually increasing to 135 by the end of 2006.

So the statistics support the idea of world food prices bumping along a floor during this period. However, things really got going in 2007. Prices rose rapidly to peak at 226 in June 2008, but fell back to 143 by February 2009.  At this stage, then, it appeared that we were experiencing a world food price ‘spike’ similar to that of the mid-1970s.

However, over the past 6 years, prices have spiked again three times, in February  2011 (240); April 2013 (217); and March 2014 ( 215). By May of this year the index had fallen back to 167 – still well above its highest level pre-2007.

There is often confusion between three different versions of rapidly rising food prices: 1) that caused by short term supply shocks; 2) the high profile attached to rising food prices in periods of general inflation; and 3) a sustained rise in the price of food relative to other products. The fact that we are currently in a period of very low general inflation, and over the past year have experienced falling food prices, does not mean that the problem has gone away.  For nearly 10 years prices have fluctuated around a level about double that of the previous 15 years. So the question is: “is it really different this time?” Have prices now been periodically hitting my price ceiling?  

The 1970s price explosion was almost entirely supply driven – a series of harvest failures and input price rises, linked to the oil price. And these have again been contributory factors – particularly the failure of the Russian harvest in 2009. But there are two new demand factors – the diversion of substantial amounts of grain to bio-fuels; and rising incomes in East Asia resulting in rapidly increasing demand for grain fed livestock.

The latter is particularly important. It has long been recognised that rising incomes typically lead to a shift in diets towards consumption of animal protein and thus increased demand for meat relative to that for vegetable products. Historically, this also meant meat prices rising relative to prices of plant based products. However, modern intensive livestock production technology now means that this growth in demand  leads to  the diversion of plant products, which  formerly went directly to human consumption, into the  animal feed market, particularly grain and oilseeds; and the well-known inefficiency of feed conversion ratios means a massive increase in the amount  of plant products that must be grown.  As a result, the impact on feed prices, and associated plant based foods, can be much greater than on the end product itself - meat. (The FAO indexes for cereals and oilseeds have risen much more than those for meat and dairy products.)

These demand changes need to be coupled with the apparent slow-down in yield increases. In the Home Grown Cereals Authority we used to build into market forecasts an assumed annual growth of 2-3% in cereal yields – this is what had happened, averaged out, for 40 years. Around 2002 this stopped, or at least markedly slowed down.

So my ‘ticking time-bomb’ is that we may have moved into an era in which food prices will demonstrate instability, but bumping against a price ceiling rather than off a floor. And what we need to explore further is the characteristics of the adjustments which constitute the price ceiling – either market driven (no more biofuel; grain diverted to human use because less meat is purchased and livestock producers go out of business, or, worse, basic food becomes too expensive for the poor to purchase); or policy intervention affecting what is produced, how much is produced, and who gets it.

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