FOOD PRICES: MAIN SUSPECTS

ABSTRACT: Since the very beginning of statistical record keeping, there has not been seen in the world a growth rate so sustained in the prices of all of the basic products (commodities). Petroleum, steel, and copper continue to increase in price, but the most worrisome increases of all, still, are the increases in the prices of wheat, meat, milk, corn, etc. There . "Forget the petroleum, the next crises will be about food…" is one of the phrases that one reads the most in the specialized magazines and the newspapers throughout the world. Isn’t that so? .

The first suspect: supply

Historically, the events of widespread increases in the prices of commodities have been associated with the problems of the supply. Natural disasters in a producing country, wars, or any other event that affect the harvests, causes the prices to shoot up, generally in a temporary manner. Of course, the first thing that is suspected as the causal agent for the actual rise in the prices would have to be the supply. Is it responsible?

In recent years, some of the major producers of grain in the world have had climatic problems that have radically affected their harvests. This is the case of Australia and Canada that have completed harvests that are considerably less than expected. But this decline in certain countries has not affected the overall production. In fact, the harvests during the past year were 2,310 million tons, which is a much higher figure than has been registered until now. There was a light reduction in the years 2005 and 2006, but it was not sufficient to be categorized as considerable, and the tendency is clearly on the rise.

It is not just the production of grains that has risen; the whole world’s agricultural production has been growing and in the year 2007 it presented high levels. Even if data for agricultural production is measured per capita, there is growth. That is to say that, the population of the world is not remaining -on the average- without food. The production continues to grow, but the prices increase at a pace that is impressive… then, the explication, does not come from the supply side, because there is no shortage(this is true with what has been seen here, but certain pieces are lacking that we will go about revealing later on).

If we are unable to find the explication on the supply side, immediately our reasoning tells us that something must be happening on the consumer side.

Another Suspect: Demand

It would appear better that we became inured to the situation, because every time we talk about a strong distortion of prices and World Wide quantity, on some side appears China with is immense power either as a consumer or as a producer. If we return to look at the graphic of the prices of commodities, we see that prices shot up since the year 2001; that is the same year in which China entered to fill the world market, upon joining the World Trade Organization. Is that just pure coincidence?

But it is not only the experience with China; there are also a large number of countries in the World who are putting new pressure on the markets of natural products. Most of the Asian countries, maintain economic growth rates that are above 7 percent and some have even come to exceed double digits at times during the last decade. Viet Nam, India, Singapore, Korea and several more countries are generating a very strong pressure on the world markets, because in order to continue growing they need a large quantity of resources. Other key players are the countries of the Ex-USSR, which not only have become more stable, but in fact, they are now starting to be what may be referred to as the new "stars" of Europe. And finally, several African countries, (as is reviewed in the magazine Perspectiva of the past month…visit the site, if you want to read the article), have managed to maintain economic growth rates at close to 6 percent annually, and while they are considerably lacking in achieving an exit from the terrible underdevelopment that plagues them, they are also demanding more resources in the world market.

What exactly is the common denominator? In all of the cases that we have just completed reviewing: Southeast Asia, Eastern Europe, and Sub-Saharan Africa, economic growth has actually allowed more people to have access to more food. In the case of Africa, it is a matter of pure subsistence; with but a little money (albeit a minimum amount), the very poor people can buy a little more bread. In the case of countries that are not so poor, the increase in income generates another type of consumption which happens to be "meat".

The issue is more or less the following: the consumption of grains(cereals) in order to manufacture bread, tortillas, arepas, papusas, brevas, etc., is closely linked with the dynamics of the population; if there are more people in the world the demand for bread increases (this is the base of the diet of human beings). While the consumption of cereals intended for the feeding of livestock and poultry does not depend so much on the population, but on the amount of money that the people have. The diet of the poor has a high content of cereals (grains), and the first thing that the poor person does if such a person can enjoy a little bit of "luxury" is to eat some meat. In 1985, the meat consumption per capita in China was 20 kilograms per year; in 2007 it was 50 kilograms per year.

In the world the population has not grown in recent years in a disproportionate manner, but, on the other hand, the amount of increase in population has grown, and by more than it costs us to believe that such is true, people are now richer, or less poor than some 10 or 20 years ago (we are always speaking of on the average). Therefore, an increase in income generates an increase in demand for meat, which in turn generates an increase in the demand for the cereals that compose the feed for livestock.

There is another phenomenon that is pressing the shift in diet at the world level. As was mentioned in the journal Perspectiva in March 2006, last year, the world is finally becoming urban (you can find such a study using the key word "cities" at www. ideinvestiga.com). More people live in cities than in the countryside, and that entails very important changes, because before people cultivated food for their own consumption and now they must work in the city in order to feed themselves. There are less people in the countryside, less harvests and more demand for food, and there really is no doubt what is going to happen to prices.
If you have followed this article with attention to the above reasoning and I hope that it is so, you will have reached the conclusion that the demand is no longer just suspicious in the increase in prices but possibly the guilty party.

But the phenomenon of shift in diet and higher consumption of cereals and meat does not occur spontaneously in the evening and in the morning. And yet, prices are growing at an accelerated rate going back two years and with more force than in the year 2007. Something more must be affecting the world market…
(I WILL CONTINUE WITH THE ANALISYS ON THE NEXT BLOG).

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