In the current situation of rapidly rising food prices, I think one has
to consider both the factors affecting supply and demand (separately)
and also the short and the long run factors affected future projected
food prices. The current run up in prices have been attributed
primarily to the Australian drought affecting grain supplies, and the
demand for corn and palm oil for ethanol/biodiesel and the demand for
grain to raise livestock to supply the income elastic demand for meat in
the developing countries, in particular China and India, as their
"middle class" grows and per-capita income rises. One can also factor
in the rising coast of fuel for agricultural production and for
fertilizer. Increases in supply of crops to meet rising prices are
problematic (i.e. supply in the short run is inelastic) because farmers
have limited control over yields other than apply more fertilizer, shift
from other crops (e.g. soybeans), or to plant on fallowed and marginal
land. Most of these short-run measures have negative long-term supply
consequences and increases the risks of short-term price variability
while raising the prices of competing crops like soybeans.
B, it is the long run future of food prices that has me worried for
a number of reasons. One is world population continues to increase
rapidly. Two, global warming threatens to reduce existing world
supplies of food significantly. Three, expansion of cropping areas to
meet increased demand from all sources threatens the release of massive
amounts of global warming gases, much in excess ot those released by
burning fossil fuels. Four, the yields from the so-called "green
revolution" in agriculture are falling due to falling water supplies,
rising soil destruction and depletion, rising fertilizer and oil prices.
Five, peak oil threatens the future productivity of industrial
agriculture ("the oil we eat"). On the other hand, ther is growing
recognition that trying to replace oil with biofuels will result in
massive increases in global warming gases and, once that penetrates the
closed minds of North American and European governments (if ever)
significant resources will be freed up for food production. However, if
the climate change projections are accurate, don't look forward to
seeing Australia again become a major regular contributor to world grain
supplies, or the southern US or Canadian Prairies for that matter.
Incidently, Canada's newspaper of note, the Globe and Mail, had a
two page spread last Saturday on the rising fortunes (prices) of farmers
as grain prices skyrocket. The only thing they left out is what these
farmers are going to do when the water and oil run out and climate
change brings permanent drought to the region.
Paul Phillips
Sandwichman wrote:
On 2/18/08, Eugene Coyle <[EMAIL PROTECTED]> wrote:
Having acknowledged that, I would add that actual agricultural
commodity costs are not the most important component of what we call
"food" prices at the supermarket.
Two points, though. One is that the demand for the basic food
commodities is going to be relatively inelastic compared to that for
those other components of supermarket prices. The second has to do
with the volatility of prices and the lead time required for supply to
respond to changes in price. Normally, the credit system and futures
market would have an important role to play in managing the financial
risks associated with such rapid increases in prices. How insulated
are the credit markets for agricultural commodities from the credit
crunch and sub-prime mortgage crisis? What inroads has securitization
made into ag. commodity derivatives markets? Is there water sloshing
around in this bathtub?
--
Sandwichman
--
Paul Phillips Professor Emertus, Economics University of Manitoba Home
and Office: 3806 - 36A st., Vernon BC, Canada. ViT 6E9 tel: 1 (250)
558-0830 email: [EMAIL PROTECTED]
