The last straw? Alongside debt, rising food prices threaten industrial growth Alan Shipman - 28-Aug-2007
Just when the world economy seemed to have found immunity to rising world fuel prices, the rising world grain price may be the shock that finally ends its long upturn, as costlier food baskets eat into household budgets.
A surge in world oil prices - to over $70 per barrel this month, almost double the level of two years ago – has not caused a return to the production downturns and price rises (‘stagflation’) that followed previous petroleum shocks in 1973 and 1979. The global economy continues to grow strongly, with emerging markets expanding fast and a pick-up in the EU offsetting signs of slowdown in the US. Relocation of industrial production, and a widening range of services, to low-cost countries is suppressing northern hemisphere inflation rates. Among the biggest of the emerging markets, Russia’s boom is being fed by oil, China’s is still largely powered by coal, Brazil is rapidly substituting its fossil energy needs from biofuel, and India’s rising exports and capital inflows have stopped its growth being checked by rising oil demand.
But could a similar peak in world grain prices, caused by low harvests in the main wheat-growing regions, be about to inflict the stagflationary blow that oil no longer delivers? Some agricultural watchers believe so, pointing out that the world is in many ways less well equipped to deal with prolonged strain on basic food supplies than with a fossil fuel shortage.
Poor harvests this season in Canada, Australia and Eastern Europe are actually a bonus for UK grain farmers, who can sell a relatively good crop into a strong EU market. But the consequent rise in prices of bread, and of meat from grain-fed animals, could be bad news for almost everyone else. While most countries build large strategic oil reserves after the last major shortages, many have let strategic grain stores run down, and lower harvests have already caused a near-doubling of UK animal feed prices according to a recent Deloitte survey.
In the nightmare scenario, higher food prices trigger a more general inflation as employees, whose wages have been failing to keep up with living costs in recent months, make use of a tight labour market to rediscover the strike weapon and force higher pay. More spending on food means less to spare for other items, worsening the drop in demand for goods and services already in the pipeline after recent interest rate rises. There is no relief from export demand because the food price rise has also choked off demand abroad – notably in China, facing a 10% drop in its harvest this year, and India, which may need another ‘green revolution’ to avoid sliding back into chronic food import dependency.
China’s industrialisation, as in all countries before it, has depended on driving food prices down so that farmers migrate to the cities and factories make enough profit to employ them, while keeping wages low enough for competitive export. Britain’s transition to a knowledge- and service-based economy depends on cheaply importing food that it long ago lost the capacity to grow. The Malthusian nightmare – of world population outstripping food supply and reversing the ‘development’ process – has been dispelled many times by rises in farm productivity. But with that rising population now looking to fill its tanks with biofuel from the same land that yields its biological fuel, the post-industrial world may soon turn back into an agricultural society, with unfamiliar exposure to the turn of the seasons and the vagaries of sun and rain.
