Tuesday, January 17, 2012

Debt and Food: A Common Cause

Eric Reguly, in the weekend Globe and Mail, tries to compare and contrast two different crisis which originated in 2008: the European debt crisis, and the international food crisis. The two crisis were linked, mostly by nervous money fleeing the world's debt markets for commodities (and both were precipitated by the criminal activity engaged in by various investment banks like Goldman Sachs and Bear Stearns prior to the housing bubble popping). The role of speculative money in causing the worldwide food price inflation of 2008 through 2011 is pretty common knowledge. Starbucks president Howard Shultz, as reported in the The Telegraph, has said:
... the current spike in the cost of commodities such as coffee and other foodstuffs is "not based on supply and demand" but based on market speculation. He said that the farmers who actually produce the commodities are receiving a "de minimus" proportion of the price rises. "Right now we are experiencing a very strange and almost inexplicable phenomenon in the commodities market. Without any real supply or demand issues we are witness to the fact that most agricultural food commodities are at record highs at once, and coffee is at a 34-year high." 
Frederick Kaufmann, in The Guardian, follows up with a brief interview with Professor Yaneer Bar-Yam, of the New England Complex Systems Institute (Necsi):
"Prices have been way out of equilibrium in 2011," Bar-Yam told me. "The bubble has not burst yet." According to Bar-Yam, the international thirst for biofuels has put a strain on arable land previously reserved for food production. At the same time as the rise of the biofuel mandate, the rise of investable commodity indexes and other electronically traded funds has offered investors of all stripes a chance to sink their cash in a sparkling new casino of derivative products. As a result, an ever-flowing spring of speculative capital sustains the status quo. But just as food is no ordinary widget, speculation in commodity markets is not simply a matter of financial predation. "The high prices of food have resulted in accumulations of inventories at the same time as people can't afford food," said Bar-Yam, who noted that the Arab spring was triggered by the food-price bubble. In fact, Necsi's quantitative model of speculation predicted the uprisings in Tunisia, Libya and Egypt, and warned that if food prices remain inflated, riots and revolutions will go global sometime between July 2012 and August 2013. "We are at a critical point," said Bar-Yam. "We don't have a stay-the-course option right now." 
Notice that quote: "The high prices of food have resulted in accumulations of inventories at the same time as people can't afford food." That makes it very clear that this is about speculation, not supply and demand.

There's more food in inventory, and more people who can't afford it—that's usually a signal for prices to come down and come more into line with what people around the world can afford. This food price inflation via speculation caught the attention of the group World Development Movement who have a great website devoted to the problem—including their own report on the issue. There have been a number of attempts to obfuscate the role of speculation on international food prices, most frequently by confusing cause and effect (it's the volatility that's driving the speculation!), but as Ron Lawson of Logic Advisors pointed out:
If you're a big money manager, your round lot, your loaf of bread, is $100-million. Well, with $100-million you can buy the entire open interest of a commodity contract. So when these guys come into the market, they're not doing it on a demand-supply basis. They're looking for somewhere to place money. They're looking for an investment that gives them alpha, some kind of yield that can improve their returns. They're the whale that jumps into the pond. 

Mr. Reguly points out the basic Malthusian problem faced by world food supplies; progressively more mouths chasing a flat-lining food supply. But while doing so, he takes the time to question the numbers being used when discussing how many people in the world are food insecure. He looks at “Measuring Food Insecurity and Assessing the Sustainability of Global Food Systems,” a report from two two -day workshops hosted by the National Research Council in February and May of 2011 which takes a critical look, as part of the discussion, at the way the FAO (the United Nations Food and Agriculture Organization) generates the widely quoted figures on international food insecurity.

The figures are, at best, questionable. Even the FAO acknowledges this. Reliance is placed on reporting by the member nations, which are then aggregated and run through various statistical tools. The numbers are, quite frankly, a “best guess” at what the world's food security position actually is.
But when Mr. Reguly states “In all likelihood, the number of hungry is less than a one billion, depending on your definition of hunger,” I would have to say that he's engaging in a bit of wish fulfilment rather than any serious analysis. There is an equal or greater likelihood that hunger is even greater than the FAO is reporting; hunger and food insecurity are more likely to be under-reported, particularly by developing nations, than over-reported. National pride, poor statistical infrastructure, poor census information, all can have the effect of hiding food insecurity as much as (or more than) over-estimating it.
Mr. Reguly continues:
Even more worrying is the FAO data on cereal productivity growth compared to population growth. Productivity growth – the extra crop yield produced each year by the same amount of land – has been on the wane because all the easy solutions, from irrigation to fancy fertilizers, have already been implemented. The productivity growth figure is now about 1 per cent, versus 3 or 4 per cent in the 1960s, 1970s and 1980s. But guess what? Population growth is now slightly higher than yield growth.
That poses two dangers. The first is generally tight supplies, leaving the food system vulnerable to production shortfalls triggered by, say, flooding or drought. The second is the spectre of mass hunger if population growth exceeds yield growth year after year. Eventually, the planet would not have enough food to feed its population.

This defines, of course, the conclusions of the Reverend Thomas Malthus, who said in the mid-1800s:
Must it not then be acknowledged by an attentive examiner of the histories of mankind, that in every age and in every State in which man has existed, or does now exist
That the increase of population is necessarily limited by the means of subsistence,
That population does invariably increase when the means of subsistence increase, and,
That the superior power of population is repressed, and the actual population kept equal to the means of subsistence, by misery and vice.1

Hugo Osvald, in The Earth Can Feed Us, points out the same issue, but also shows how the mid-twentieth century de-linked population growth from population limiting pressures. Modern medicine reduced the effect of infectious disease and the “Green Revolution” he championed would once again allow agricultural production to exceed population growth.
The success of both these developments had the result of encouraging people to believe that Malthus was wrong, and that technological improvements would continue to confound him forever. But even Osvald recognized that what he was proposing was little more than a stopgap. When Mr. Reguly suggests that “crop productivity may be on the verge of a rebound, however modest, thanks to improved irrigation techniques, genetically modified seeds (tailored, for instance, to resist to certain bugs or diseases, or to be suited to saline conditions),” he has pointed out that “all the easy solutions, from irrigation to fancy fertilizers, have already been implemented.” What he's not noticing is that it is the implemented fact of irrigation that has caused the increase in salinity in the fields that now requires that we use genetically modified seed that can survive the salinity. This is because the solutions we adopt are those that bring the greatest results in the shortest time—but that is not always the best solution nor the most effective.
But we are not in Malthus' end times just yet. As Mr. Reguly notes, “hunger is more of a purchasing power problem than a supply problem,” although he also notes, a few paragraphs later that “[r]ecord cereal crops helped drive down prices, proving that the best cure for high prices is high prices, which stimulates extra production.” What it doesn't explain is how this solves the purchasing power problem of roughly a billion people. Land reform, co-operatives, fair trade, and education programs have a better track record of building local wealth and feeding local populations than the current neo-liberal trade regime does. Particularly since more open trade has been used, as people like Raj Patel and Vananda Shiva have detailed, to destroy local food systems, strip mine them of their embodied capital, and replace them with a dependence on imported food, seed, and equipment.
And while Mr. Reguly is happy to report that “[f]ood prices, while still high by historical standards, are coming down. This week, the FAO reported that its food price index fell 2.4 per cent in December over November, taking it down 11.3 per cent below its February, 2011, peak,” this is not universally true. Canadians have seen that they have “paid 4.8% more for food in the 12 months to November, the largest increase since July 2009. The November gain follows a 4.3% increase posted in October.” So while food prices may be down from their peak, they have in no way recovered from the bubble effect of speculative cash in the system. (check out this interactive spreadsheet of world food prices put together by The Guardian).
And while “[t]o the hungry, excess debt is a rich country’s problem that they could only dream of having,” until the debt crisis is handled and investors can safely go back to generating bubbles in other sectors of the economy, the food crisis will not be “solved” until the debt crisis has been dealt with. And that will only help with the current issues around the food supply. Eventually we will have to deal with stacking techno-fix on techno-fix without looking at the underlying problems, the corporate concentration in the food industry, and the “purchasing power” problem of poverty.
1Malthus T.R. 1798. An essay on the principle of population, in Oxford World's Classics reprint. p61, end of Chapter VII

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