Food Economic Zen ... er, Sen

Amartya Sen (who won a Nobel Prize in Economics for his work on famines) had an op-ed piece in the NY Times yesterday on the recently rising food prices. He hits most of the major points very well (said the grasshopper). To summarize him and the other points going on: There are both temporary and long-term changes going on. The supply shocks are all temporary and can be resolved quickly. The world is still producing more food than ever. It's the demand shocks that are longer-term. Rising incomes and population mean greater food demand, and that has been known and foreseen for quite some time.

So why did a few temporary supply shocks generate so much hoopla? There are two (possibly three) other pieces going on, though, that make it more difficult: government policy, government policy, and (possibly) speculation.

• Policy 1 - Ethanol subsidies. The US ethanol subsidies are diverting large amounts of farmland and production to fuel rather than food. In addition to increasing food prices, though, there are several other unintended effects. 1) Ethanol production in the US is not only inefficient economically, but environmentally since it takes more fuel and creates more pollutants to grow the corn and turn it into ethanol than it replaces. (Ethanol production in Brazil is a different matter.) 2) As de Gorter and Just point out as summarized here, the combination of ethanol mandate and subsidy is actually serving to subsidize OIL. Little of the money is going to the farmers the programs are ostensibly geared towards, and at the same time harming the environment. That's some bad policy juju.
• Policy 2 - As food prices increased, civil unrest increased in a number of economies, demanding that the government "do something." So they do some of the worst things possible: freeze food prices (so now there are no incentives for farmers to increase production, and let's not forget that lower prices actually benefit the rich and not-so-poor more than the actual poor because of their buying power) and tax or block exports in an attempt to force food self-sufficiency (which combined with the first effect is more bad juju, but more importantly leads to even higher world prices for everyone else, starving neighboring countries and giving more impetus for other governments to do the same). Meanwhile, actual agricultural development projects go by the wayside, slowing supply increases yet further.
• Eventually (some people surmise) we get to a threshold where people get really scared and we have food-bank runs. My adviser was worried I was "one of those people" when I mentioned it might be a good time for us to sell our food storage and make a profit. I reassured him our own stockpiles were acquired for religious purposes two years ago, and really wouldn't make us any money.
  

The thing is that this is all happening in a time when there is (worldwide anyway) plenty of food. Sen got his Nobel for discussing the emergence of a famine that occurred with bumper crops as a result of bad government policies and problems in the market system. He concludes, "Domestic economic reforms are badly needed in many slow-growth countries, but there is also a big need for more global cooperation and assistance. The first task is to understand the nature of the problem."

The other issue that is easy to forget with all the headlines is that prices aren't that high in real terms. Once you take out inflation, yes, food prices are currently higher than at any time since 1988, but they are still lower than at any time before that! I would show you the graph I just made for Chapter 7 in the book I'm writing with Per and Fuzhi, but it isn't copying well. They are still less than half what they were in 1974.

Keep in mind, this isn't the first time we've seen a price spike. In 1996, prices increased by 50% from one year to the next and commentators began shouting that it was the end of cheap food. It wasn't. Prices went back down as production increased thanks in part to the higher prices from the year before. The supply shocks in this case will be over and gone next year. The real question is how long the misguided government policies will still be in place. Per is sufficiently confident, he wrote in the last draft of Chapter 7: "By the end of 2008, food prices had once again entered a new long-term downward trend although at a higher level than where the previous trend ended."