Philip Bowring in the IHT asks us to keep an eye on it. A warning, and something to note. I may as well quote the whole thing:
The world may soon pay a high price for years of low global food prices resulting in large part from European and U.S. farm subsidies. The winners could include China’s long-exploited farmers.
We should remember that food shortages were second only to oil prices in causing the huge global inflation of 1973 to 1975, which resulted in a collapse of financial asset prices and pushed the global economy into deep recession. Then, as now, the surge in commodity prices followed a period of easy money and rapidly rising financial markets.
History is threatening to repeat itself. Despite a hoped-for small rise this year, China’s grain output is still some 12 percent below its peak, and the country is experiencing another large grain deficit. Most of India is still anxiously awaiting a belated monsoon. Unless it comes soon, India’s ability to export food will be in jeopardy. Australia, too, has another drought.
While both India and China have huge grain stocks, the interlinkage of poor local harvests and tight international supplies is clear enough. The revival of inflation in China is due more to food prices – up 30 percent over a year ago – than to oil and other minerals.
That may not seem important for rich nations, for whom raw food prices are a tiny part of the price index. However, in an interdependent world, and especially one in which China plays a major role as supplier of manufactures, food prices are the beginning of an inflation chain.
The 30 percent rise in grain prices in China is spurring 4 to 5 percent or more consumer price inflation, which thus requires wage increases well ahead of productivity growth. Those additional wage costs are on top of higher prices for oil, steel, copper, plastics, etc.
Sooner or later these will be reflected in export prices and hence in a significant portion of retail sales in the United States. Inflation could again become embedded.
Given China’s extremely competitive position in labor-intensive manufacturing, it is unlikely to suffer significant loss of market share by raising prices. Alternative suppliers are facing many of the same cost pressures or have currencies that have appreciated against the dollar.
The good news is that in the short run farmers in China and elsewhere will see their incomes rise, slightly redressing China’s immense urban-rural income gap. The longer-term opportunity is that it will lead to investment in China to boost rural labor productivity, create off-farm employment, and promote the pricing of China’s scarcest resource – water.
Whatever the long term outcome, today’s reality is that real food and commodity shortages exist side-by-side with excess global liquidity and low interest rates.
It is not a comfortable combination, and it could well get worse if the weather compounds man’s self-created problems.
Keep an eye on China’s grain production? OK. Will do. Thanks.
btw I’d be interested to read any news you find on the Common Agri Policy (CAP). Apparently, if CAP was scrapped it’d be of enormous help to the world’s poorest nations and may even help solve their problems.
It would help, but not hugely, as the basic economics of world change won’t change much.
The developed world has lots of capital and technology to use and fewer people, so it’ll probably retain its productivity advantage in most crops.
Given freer trade, the third world could specialise in production using its abundant resource – labour. That’s as likely to involve textiles or industrial products as the agricultural staples though. It would probably be more important for South America than any other region, given its huge potential for exporting grains and meat according to Martin Wolf’s new book.
According to today’s FT, five of the leading powers – the US, EU, Australia, India and Brazil – have agreed to a common agenda of reducing barriers to agricultural trade. They now have to sell this to all the other 150 odd members of the WTO, each of whom has an equal vote, but it’s undoubtedly an encouraging start.
No doubt both Ireland and South Belgium will be doing their best to derail it, but it might just fall foul of a rising popular anger in the rich world at the obvious injustice of the system.
Memo to Mr Bowring: Place both hands on the back of your knees, slide upwards along the legs and there you have it.
I saw a similar article in the FT yesterday, quoting Lester Brown of the Worldwatch Institute. He seems to be tooting his “China will eat the world bare!” horn, yet again. The same arguments seem to be reproduced in the IHT, although without atribution.
“We should remember that food shortages were second only to oil prices in causing the huge global inflation of 1973 to 1975, which resulted in a collapse of financial asset prices and pushed the global economy into deep recession. Then, as now, the surge in commodity prices followed a period of easy money and rapidly rising financial markets.”
Nope, the causality ran the other way around. Money growth, driven at that time by the dollars printed by the Johnson and Nixon administrations to fund Vietnam and the Great Society programmes created the inflation. The monetarists (using the word in the correct sense and not as Deputy Frank Ross does) were correct in pointing out that this was another proof that “Inflation is always and everywhere a monetary phenomenon” in the words of Milton Friedman.
Without the money growth, the oil price hikes would probably not have been possible, given that OPEC voted for price increases every year for a decade before 1973.
The expanded money supply fed through into higher prices for frequently-traded commodities and currency movements, as these are the most flexible prices in any economy. The FT were covering this in yet another article, citing researc by Jacob Frankel http://ksghome.harvard.edu/~.jfrankel.academic.ksg/overshootingmodel.pdf
So no, I don’t think that food price rises in China signal global inflation. Anyone should observe that inflation at 5% in consumer prices is a problem in China mainly as a rapid run-up in commodity prices and speculative assets. Like Ireland, it has a currency peg at too low a level and interest rates (under 4%) lower than inflation, with the same result: stratospheric house price inflation.
Even a mere journalist might figure out, if he knew a little of the economic theory of trade, that countries will specialise in areas where they have an advantage. For China, with 1.3 billion people, that has to be labour.
Trying to squeeze the food for all these mouths out of a tiny portion of the Earth’s soil is crazy: You can expect that Canada, Australia, Argentina, Russia, Ukraine and America will be willing and able to supply the grain and other foodstuffs needed, especially with all those walking tomatoes Monsanto promises us.
The curent policy would be analogous to growing potatoes on small patches of ground between the office blocks of the IFSC.
However, China does have a deeply-embedded fear of famine, which drives the misquided focus on self-sufficiency, as well as the unfortunate tendancy to eat just about anything.
Might I recommend this paper to cover some of these issues?
http://www.ers.usda.gov/publications/aib775/aib775k.pdf
You really should read Lomborg’s Skeptical Environmentalist, who covers Brown’s grain scare story in depth and thoroughly dismembers it. (I had a long talk with him over lunch today, and he’s a true gent).
The UN FAO, the leading global agency for agriculture is similarly dismissive of Brown, so
it’s safe to take our overflowing bowl of rice with as big a pinch of salt as we wish.