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Are higher food prices here to stay?

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In Brief

Does the recent upturn in grain prices, or more generally food prices, signal a permanent reversal of the long-term downward trend in the real prices of foodstuffs?

This question seems to underlie most comments on the recent food price increases — and, incidentally, commentary on the 2006–08 upturn in primary commodity prices.

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Adverse weather events such as droughts in China, Russia, Ukraine, Kazakhstan and Australia, and floods in Australia, India and Pakistan, and the nonsensical subsidising of bio-fuels by the EU, US and Australia have been at least partly responsible for the high level of volatility in food prices since 2006. Disruptions of food supplies due to adverse weather will no doubt continue. Likewise, irresponsible policies by major food producers, which have caused sharp fluctuations in food prices in the past, will no doubt continue.

The real price of foodstuffs (as measured by indices published by the IMF and World Bank) has been trending upwards since 2000 — except during the financial crisis. But this recent upturn is in the context of a downtrend in the index over the past century or so. During this time there have been fairly prolonged upturns: between 1910 and 1920; from the Great Depression to the end of World War II; and in the early 1970s. Is the 2000–2011 period any different? Does it point to a reversal of the century-long downtrend in real prices?

Factors that have been suggested as contributing to a long-term uptrend in the real prices of foodstuffs are the following: higher incomes in large developing countries leading to increased demand for income-elastic foods such as high-protein meats, dairy products, fruits and vegetables, edible oils, and seafood; increased demand for bio-fuels as substitutes for fossil fuels (in competition with their role as food stuffs or feedstuffs); reduced agricultural productivity growth (blamed largely on reduced funding of agricultural research); larger populations and higher incomes — particularly in developing countries — leading to agricultural land being drawn into urban and industrial uses (which means that lower quality arable land is being used in agriculture); higher long-term prices of increasingly scarce water and energy (important agricultural inputs); and the highly uncertain impacts of climate change.

Despite this forbidding list of factors, there is hope that the long-term downtrend in the real prices of food stuffs will continue — largely because the productivity increases that have driven the century-long downtrend will continue. It is noteworthy that over the latter half of the past century — the period of the most rapid growth ever in the world’s population — that agricultural output grew even faster than population growth. The rate of global population growth is slowing down rapidly and future population numbers are not likely to be as dire as the UN Population Division is projecting. I estimate that due to the UN’s propensity to under project the decline in fertility rates across the world that the global population will peak at 500 million to one billion less than what is currently projected. The declining populations now experienced in some countries in East Asia and southern Europe (with Total Fertility Rates close to 1.0, half the replacement rate) will be more of a future concern for many other countries, rather than increasing populations.

Because of the slowdown in the global population growth rate, the world does not need food output to increase as rapidly as it has over the past half century or so. Concerns about the slowdown in agricultural productivity growth are thus not as serious as many make out and should not be used to argue for sharply increased research funding. What is of more concern for agricultural research is that the main research tool in the agricultural researchers kitbag — bio-technology research — is being restricted by the Luddite actions of people trying to prevent such research. Governments need to develop some courage and support bio-tech research strongly.

The continuing slowdown in global population growth will also reduce the concerns about the loss of arable land and the increasing scarcity of water and energy. Water-saving and energy-saving agricultural research will also help to ameliorate such concerns, if allowed, as well as assist in adaptation to any adverse impacts from climate change.

Hopefully incomes in developing countries will continue to increase, leading to greater demand for income-elastic foods. Agricultural research and open trade around the world should allow these demands to be met without permanent increases in real prices. But bad policies, including export bans — which have contributed to the recent price increases — will no doubt remain a continual threat to cheaper, more available foods.

Ron Duncan is Emeritus Professor at the Crawford School of Economics and Government, The Australian National University

One response to “Are higher food prices here to stay?”

  1. Thanks for a good overview, Ron.
    Just a few comments:
    First, your focus on policy problems:
    “nonsensical subsidising of bio-fuels by the EU, US and Australia have been at least partly responsible for the high level of volatility in food prices since 2006. Disruptions of food supplies due to adverse weather will no doubt continue. Likewise, irresponsible policies by major food producers, which have caused sharp fluctuations in food prices in the past, will no doubt continue.”
    It will not be easy to correct these policies, but we should do better than shrug.
    The G20 can, and should put these issues on their agenda. They will not act overnight, but consistent advocacy of better policies will be effective in due course.
    Secondly, I am surprised that you do not support increased funding for research. The improvements in productivity in recent decades did not happen by accident. Climate change implies a much greater need for adaptation. We need to research ways of managing that.
    Andrew Elek

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