Edward Seaga, Contributor
FOOD PRICES are increasing at a rate unprecedented in the post-World War II period. The question is how temporary or permanent is this phenomenon?
Increased food prices in the past, have been spikes that have receded once the cause was identified and corrective measures put in place.
Such spikes have been generally a result of natural disasters afflicting food crops, or some act of insurgence or war, which dislocated production and supply. These have had temporary effects that resulted in high prices receding in due course, with some residual damage.
Rising oil prices
In the current situation, high food prices are substantially related to the diversion of food crops to be used for conversion to ethanol as alternative sources of energy to higher-cost petroleum.
This resort to bio-organic fuels from sugar cane, grapes, citrus, corn, soya and other crops, is a result of the rising price of oil, which is escalating dramatically, creating an urgent need for alternative energy sources.
Additionally, over the past few months, the price of oil has moved from US$90 per barrel to the current US$117. Since oil is critical to the production cycle, this movement in price is also creating another layer of price increases in the production of consumer goods, inclusive of food items.
There is a third reason why food prices are increasing. Huge financial surpluses accumulating in the accounts of countries which are experiencing buoyant economic growth of unprecedented magnitude have to find investments yielding attractive returns. These are known as sovereign funds.
Sovereign-fund investments
The principal source of these sovereign funds is the BRIC countries (Brazil, Russia, India and China), which are now showing remarkable economic growth and generating huge surpluses, particularly in exports.
These funds in the past have been invested heavily in the bond markets of the rich countries, particularly the United States, where their investments are secure and the yield on their investments attractive.
However, the US dollar has been weakening significantly over the past several months and investments in US bonds have declined when converted back to stronger and more stable currencies.
Faced with this predicament of the declining value of US dollar terms, the pool of sovereign funds has found that it is more profitable to invest in American commodities, such as food staples, than in the declining value of bonds linked to the US dollar.
This pool of sovereign-funds investment is driving up the prices of food commodities, particularly wheat, corn, soya and rice, which, in turn, affects animal feed and, correspondingly, meat prices.
Are prices reversible?
Ultimately, then, food prices are moving because:
The principal cereal crops are being used for conversion into ethanol or are being short-planted to make more space for additional production of cereals which can be so converted. Energy required to harvest and process food crops is also concurrently increasing in cost, because the price of oil is increasing on a rapidly rising scale. Sovereign funds seeking the best returns on investment have targeted scarce food crops as logical areas which will readily respond to investment with spikes in price movements. These sovereign funds are more permanent than temporary investment resources and will continue to put pressure on food prices.The big question to be resolved is to what extent are these price movements reversible? Will the exceptionally high prices now being experienced return soon to normal levels? The only way to answer this is to look at the causative factors as outlined above in order to assess whether their dynamic impact will recede.
In other words: Will the price of oil be reduced to the previous much lower levels? This is highly unlikely, if not impossible, since the remaining global pool of oil is shrinking to a point of exhaustion within, it is estimated, 50 years. Because of this growing scarcity factor, the price of oil will continue to increase, unless a new source of affordable and sustainable global energy is found.
With higher production costs resulting from increased oil prices, the price of food, especially cereals and meat and their products, will continue to rise.
Given the inevitable continuation of increases in the price of oil, the expectation is that food crops to be converted into ethanol for energy will not resume food production but will remain in use for the production of ethanol and, indeed, more land will be sought to provide even more feed stock to produce more ethanol. Food prices will then be under continuing pressure. As long as a scarcity of food crops exists, investments will find it attractive to invest in food commodities. This attractiveness under these conditions is not likely to recede until the US dollar stabilises its value, at which point some of the investment funds now pushing up the price of food will return to investment in bonds.Restructure lifestyle
In assessing the pressure points in price movements, there is a deeper underlying factor. To the extent that higher prices are here to stay, Americans will have to make a quantum shift in their standard of living, reducing the demand of the American consumer to meet the higher cost of food and other goods.
It will not be easy for the American to restructure the lifestyle of plenty which they have been accustomed to over many generations, if not longer. Policymakers will be under pressure to fight back, which could lead to a destabilisation of the present globalised economic order. The end result could be anything but peaceful growth.
In short, the hard times now being experienced by this enforced structural adjustment of the US economy will take a good deal of time to stabilise, and how and when it will end is still not clear. The only clear conclusion is that cheap prices are gone forever.
Next week, I will look at how the American predicament will affect the Jamaican economy and Jamaica's standard of living.
Edward Seaga is a former prime minister. He is now a Distinguished Fellow at the UWI. Email:odf@uwimona.edu.jm
