February 15, 2008

The Coming Food Crisis

The rising costs of food and subsequent potential for crisis should not come as a surprise to anyone paying attention to commodity markets and policies.

From the New York Times:

The distortions in agricultural production are startling. Corn prices are up about 50 percent from last year, while soybean prices are projected to rise up to 30 percent in the coming year, as farmers have replaced soy with corn in their fields. The increasing cost of animal feed is raising the prices of dairy and poultry products.
--September 19, 2007

The general media is not paying much attention to this, as subprime related news continues to dominate most outlets. However, the situation demands a shift in focus to a problem that will likely have a much deeper impact on the world (i.e. famine and starvation).

Today's Financial Times points out a few more structural problems within the current market:

Rising food prices pack a powerful political punch in the developing (or partly-developed) world, to a degree that is sometimes underappreciated by the pampered west...

Goldman Sachs thinks this is just part of a much bigger problem of capital and resource misallocation. After all, Mr Currie argues, if the world today was a rational economic place, then regions such as the Gulf which are food-constrained ought to be investing heavily in agriculture. And since the US is the world's biggest agricultural supplier, this implies that the Saudi Arabians, say, should be snapping up farms in Wisconsin - as America secures oil in the most efficient manner by sending teams of Texans to Riyadh.

But in practice numerous investment controls prevent Saudi Arabians from buying Wisconsin farms and Americans owning Saudi oil wells. And these controls are not being dismantled now. On the contrary, mutual mistrust is now rising. Hence the fact that Gulf leaders are currently considering desalinating sea water to plant wheat in the desert - while the US and Europe are trying to turn corn into fuel. Such exercises might make sense in domestic political terms; but they are apt to be fiendishly expensive. Thus the upshot of this misallocation, Mr Currie would argue, is even more inflation - even if the world does experience some form of growth slowdown.

This campaign season, consider the issues facing the rest of the world and America's role in finding solutions. We need a leader who is informed, capable and willing to deal with situations unrelated to subprime or Iraq... immediately.

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