A new word has crept into economic terminology: agflation. It might sound cute, but beneath this new jargon lies a strong conflation of agriculture and inflation — two major factors that are spelling the end of a cheap food era as we know it today.
Agflation, from all accounts, seems to be propelled by an increase in food prices as a result of increased human consumption demand, and more ominously, from the diversion of basic crops into usage as alternative energy sources. For those in the Middle East, who have seen basic food commodity prices rise sharply over the past year, matters may yet become more grim, especially if more crops are diverted for alternative energy sources.
One can understand the appetite for more and better food from expanded affluence of wider segments of society in fast growing economies such as India, China and Russia. Such societies are no longer content with the diets of their parents, but are eating more meat and chicken and demand for these commodities is rising. What seems to be a problem in meeting this surge in demand is the use of food crops as a source of energy in place of fossil fuel - or the current fad for bio-fuels.
While scientists improve on bio-fuel extraction, commodity traders have seen prices of basic food - from rice to butter, soybean and corn - rocket. The effects have been disastrous for some communities. With riots in Mexico in response to a 60 percent rise in the cost of tortillas.
Maybe the day is still far away before we witness rice or butter riots, but consumers everywhere are feeling the effect of higher food prices. Such thoughts have even revived some interest in the work of the 18th century British economist Robert Malthus, who had predicted that the growth of the world’s population would eventually out-strip the world’s ability to produce food, leading to misery and mass starvation to bring about population equilibrium. No wonder economics was termed the “dismal science,” but it was a breakthrough in science. Better utilization of existing land resources to produce more food at the time of a growing population seemed to save the day.
An important element of current agflation is the issue of the humble corn. While consumption of corn by itself is not great around the world, it is of great importance to the agro-food economy of the world, as much of it is consumed indirectly in different processes. The eggs, milk, cheese, butter, chickens, beef and even ice cream we consume daily are all produced using corn. As such, what happens to the price of corn affect each and every one of these commodities. Why the worry then? Over the past year the global price of corn has doubled, and demand has outstripped supply to the extent that world grain reserves have diminished to barely two-month levels - the lowest since the mid-1950s.
The culprit in this has been the diversion of grain and corn into the production of ethanol and the growing trend for the US - the world’s largest exporter of grains - to produce grain for its ethanol distilleries. It could just be possible for some other countries or geographical regions to take up the slack in US world grain exports - two-thirds of world demand - but other countries are jumping onto the bio-fuel bandwagon.
In the European Union, farmers are also switching to fuel crops to meet stringent EU requirements that bio-fuels should account for around 20 percent of the European energy mix. For the moment, ethanol seems to be an extremely popular energy alternative for politicians who wish to espouse fossil fuel “independence,” and also claim to combat harmful green house gas emissions.
The result of this headlong rush for grain-based bio-fuels is that eventually grains and sugarcane prices are tracking oil prices, and when both these are rising, the price of food and inflation is also rising. For some sections of society, such price rises might seem a nuisance at best, but for the majority of the world’s poor it means life or death, especially for the world’s two billion poorest, who will pay the price to keep around 800 million people who own automobiles happy.
For many in the Middle East this could mean a change in lifestyle, a greater dependence on homegrown food products, and some dietary alternatives to rice and grain. Others might still be shielded from higher food prices through generous government subsidies, but these could become costly in the long run, and unsustainable especially if state revenue fortunes change.
Hopefully, current higher food prices and the promotion of ethanol production in order to reduce dependence on imported oil might trigger a wider debate on how societies around the world are selfishly exploiting nature’s limited resources to the detriment of all societies - producers and consumers - in the end. If nothing is done to slow down the culture of ever increasing consumerism and waste, and increase the concept of conserving and recycling, then it could just be possible that one day Malthus might be proven right.
— Dr. Mohamed Ramady is visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals, Dhahran.