The end of cheap food


Richard Moore

...the rise in prices is also the self-inflicted result of
America's reckless ethanol subsidies. This year biofuels
will take a third of America's (record) maize harvest. That
affects food markets directly: fill up an SUV's fuel tank
with ethanol and you have used enough maize to feed a person
for a year.

Original source URL:

The end of cheap food
Dec 6th 2007
The Economist

Rising food prices are a threat to many; they also present the world with an 
enormous opportunity

FOR as long as most people can remember, food has been getting cheaper and 
farming has been in decline. In 1974-2005 food prices on world markets fell by 
three-quarters in real terms. Food today is so cheap that the West is battling 
gluttony even as it scrapes piles of half-eaten leftovers into the bin.

That is why this year's price rise has been so extraordinary. Since the spring, 
wheat prices have doubled and almost every crop under the sun‹maize, milk, 
oilseeds, you name it‹is at or near a peak in nominal terms. The Economist's 
food-price index is higher today than at any time since it was created in 1845 
(see chart). Even in real terms, prices have jumped by 75% since 2005. No doubt 
farmers will meet higher prices with investment and more production, but dearer 
food is likely to persist for years (see article). That is because ³agflation² 
is underpinned by long-running changes in diet that accompany the growing wealth
of emerging economies‹the Chinese consumer who ate 20kg (44lb) of meat in 1985 
will scoff over 50kg of the stuff this year. That in turn pushes up demand for 
grain: it takes 8kg of grain to produce one of beef.

But the rise in prices is also the self-inflicted result of America's reckless 
ethanol subsidies. This year biofuels will take a third of America's (record) 
maize harvest. That affects food markets directly: fill up an SUV's fuel tank 
with ethanol and you have used enough maize to feed a person for a year. And it 
affects them indirectly, as farmers switch to maize from other crops. The 30m 
tonnes of extra maize going to ethanol this year amounts to half the fall in the
world's overall grain stocks.

Dearer food has the capacity to do enormous good and enormous harm. It will hurt
urban consumers, especially in poor countries, by increasing the price of what 
is already the most expensive item in their household budgets. It will benefit 
farmers and agricultural communities by increasing the rewards of their labour; 
in many poor rural places it will boost the most important source of jobs and 
economic growth.

Although the cost of food is determined by fundamental patterns of demand and 
supply, the balance between good and ill also depends in part on governments. If
politicians do nothing, or the wrong things, the world faces more misery, 
especially among the urban poor. If they get policy right, they can help 
increase the wealth of the poorest nations, aid the rural poor, rescue farming 
from subsidies and neglect‹and minimise the harm to the slum-dwellers and 
landless labourers. So far, the auguries look gloomy.

In the trough

That, at least, is the lesson of half a century of food policy. Whatever the 
supposed threat‹the lack of food security, rural poverty, environmental 
stewardship‹the world seems to have only one solution: government intervention. 
Most of the subsidies and trade barriers have come at a huge cost. The trillions
of dollars spent supporting farmers in rich countries have led to higher taxes, 
worse food, intensively farmed monocultures, overproduction and world prices 
that wreck the lives of poor farmers in the emerging markets. And for what? 
Despite the help, plenty of Western farmers have been beset by poverty. 
Increasing productivity means you need fewer farmers, which steadily drives the 
least efficient off the land. Even a vast subsidy cannot reverse that.

With agflation, policy has reached a new level of self-parody. Take America's 
supposedly verdant ethanol subsidies. It is not just that they are supporting a 
relatively dirty version of ethanol (far better to import Brazil's sugar-based 
liquor); they are also offsetting older grain subsidies that lowered prices by 
encouraging overproduction. Intervention multiplies like lies. Now countries 
such as Russia and Venezuela have imposed price controls‹an aid to consumers‹to 
offset America's aid to ethanol producers. Meanwhile, high grain prices are 
persuading people to clear forests to plant more maize.

Dearer food is a chance to break this dizzying cycle. Higher market prices make 
it possible to reduce subsidies without hurting incomes. A farm bill is now 
going through America's Congress. The European Union has promised a 
root-and-branch review (not yet reform) of its farm-support scheme. The reforms 
of the past few decades have, in fact, grappled with the rich world's farm 
programmes‹but only timidly. Now comes the chance for politicians to show that 
they are serious when they say they want to put agriculture right.

Cutting rich-world subsidies and trade barriers would help taxpayers; it could 
revive the stalled Doha round of world trade talks, boosting the world economy; 
and, most important, it would directly help many of the world's poor. In terms 
of economic policy, it is hard to think of a greater good.

Where government help is really needed

Three-quarters of the world's poor live in rural areas. The depressed world 
prices created by farm policies over the past few decades have had a devastating
effect. There has been a long-term fall in investment in farming and the things 
that sustain it, such as irrigation. The share of public spending going to 
agriculture in developing countries has fallen by half since 1980. Poor 
countries that used to export food now import it.

Reducing subsidies in the West would help reverse this. The World Bank reckons 
that if you free up agricultural trade, the prices of things poor countries 
specialise in (like cotton) would rise and developing countries would capture 
the gains by increasing exports. And because farming accounts for two-thirds of 
jobs in the poorest countries, it is the most important contributor to the early
stages of economic growth. According to the World Bank, the really poor get 
three times as much extra income from an increase in farm productivity as from 
the same gain in industry or services. In the long term, thriving farms and open
markets provide a secure food supply.

However, there is an obvious catch‹and one that justifies government help. High 
prices have a mixed impact on poverty: they hurt anyone who loses more from dear
food than he gains from a higher income. And that means over a billion urban 
consumers (and some landless labourers), many of whom are politically 
influential in poor countries. Given the speed of this year's food-price rises, 
governments in emerging markets have no alternative but to try to soften the 

Where they can, these governments should subsidise the incomes of the poor, 
rather than food itself, because that minimises price distortions. Where food 
subsidies are unavoidable, they should be temporary and targeted on the poor. So
far, most government interventions in the poor world have failed these tests: 
politicians who seem to think cheap food part of the natural order of things 
have slapped on price controls and export restraints, which hurt farmers and 
will almost certainly fail.

Over the past few years, a sense has grown that the rich are hogging the world's
wealth. In poor countries, widening income inequality takes the form of a gap 
between city and country: incomes have been rising faster for urban dwellers 
than for rural ones. If handled properly, dearer food is a once-in-a-generation 
chance to narrow income disparities and to wean rich farmers from subsidies and 
help poor ones. The ultimate reward, though, is not merely theirs: it is to make
the world richer and fairer.

Copyright © 2007 The Economist Newspaper and The Economist Group. All rights 

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