Saturday, April 05, 2008

Inflation in basic food supplies

The most significant financial stories in the news this week had nothing to do with sub-prime write downs or credit issues. They were all about the very significant increases in the prices of basic food necessities such as rice.

For people living at the margins between financial advancement and poverty, high inflation in the necessities of life such as rice (a basic food staple for nearly half the world's population), other foods, electricity, transport, water and so on, are hugely material. For households struggling to make ends meet, experiencing increases in basic necessities of up to 30% (or more) within the space of a year is a major problem. It is little wonder that hoarding has become an issue in some countries (India announced it would crack down on hoarding). Suggestions that exporting nations may be forced to reduce exports have also been in the news. As examples, questions have been raised over Australia's rice and wheat exports due to drought) and Thailand's rice exports (domestic demand).

The prospect of food becoming a major political and economic issue as rising demand from a growing population and bio fuels collide with relatively inelastic supply is very real. In many countries food riots are a very real possibility.

It's also a problem which has few obvious solutions. Subsidies (a typically myopic political solution) will do nothing to increase supply as there is very little additional arable land available. Planting more of a given crop is usually at the expense of alternative crops. Also, given how much water gets used up in agricultural production, clearing more land for agriculture carries a very significant cost in terms of both environmental impact and future water shortages. Genetic modification will help and the world may be forced to accept GM foods more readily that at present. Likewise, given that organic farms are less productive that ones which use fertilisers etc, we may be forced to accept that organic foods are environmentally and socially less desirable than many people would like to believe.

Of course, if we really really wanted to address the issue of rising food prices and the risk of food shortages we should all become vegetarians. Somehow, I cannot see that happening anytime soon.

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