F.A. Farm

[NOTE: It has been many months since I blogged on this site and I think it is time I get back to it. I have a lot of back-logged writings that I will post here.]

It has been clear for some time that the Tunisian riots have a strong food price component. Here is an interesting link from the Washington Post. http://voices.washingtonpost.com/political-economy/2011/01/spike_in... The article's headline is, "Spike In Global Food Prices Contributes to Tunisian Violence," and a key sentence is, "An FAO report noted that 'recent bouts of extreme price volatility in global agricultural markets portend rising and more frequent threats to world food security.' "

Economists like to emphasize price. Price is usually thought of as resulting from the interaction of supply and demand. Reductions in supply increase price. Reductions in demand lower price. Some economists still hold onto the fiction that ALL of us are "price-takers." In other words, we have to take whatever price we can get from the "invisible hand of the market" for the goods and services and labor we trade for the money we need to buy food and other items and services. [Sidebar: Note how price requires money.] However, the universal price-taker idea does not square with the reality of corporate muscle in the marketplace, especially when a corporation controls both the costs of its inputs as well as its outputs. These corporations are effectively price-makers, not price-takers.

For example, Wal-Mart can bargain for extremely low prices for its inputs because of its sheer size and buying power. It can also bargain for pallets of goods to be packed in a certain way that expedite its stores' logistics. Because of the efficiencies of its control of its inputs, the money that Wal-Mart takes in for retails sales is already in the stores' tills BEFORE they have to pay their suppliers. This amounts to the customers paying the capital costs of the stores. If other stores have to get bank lines of credit to pay suppliers before they sell the item (the usual process), then Wal-Mart is essentially getting a free line of credit from their customers. If the cost of credit is 6%, Wal-Mart is already ahead of its competitors by 6%. In a category where a 3% profit margin (as in grocery megastores) is common, Wal-Mart has already kinked the game from the start. It is no surprise that 2 of the Walton family members are on the list of the top 15 richest people in the world. What IS surprising is why Wal-Mart isn't bigger than it is already! There are likely inefficiencies of scale at work here that most economists cannot calculate or even comprehend.

What does this mean for food prices and food security? We can see in Tunisia that volatility in food prices can have deleterious effects on internal security within a country. We also know that a price rise alone can trigger riots, as the high price of wheat did in 2008 in several countries around the world. We might also surmise that the low food prices in the US also contribute to the relatively peaceful conditions we enjoy. So, high food prices and even volatility in food prices contributes to domestic unease. Low food prices contributes to domestic security. Therefore, the greatest contribution to food security would seem to be to keep food prices low - and this is exactly the logic of the US government and most corporate, government and academic thinkers.

However, in order to keep food prices low to ensure domestic tranquility, the food will still have to be grown somewhere. If it cannot be grown in-country, it will have to be shipped in from someplace else. If there is plenty to go around AND the food is reasonably priced AND the food can be shipped to the countries that need it at a low cost AND there is only a limited amount of graft in the transactions, there is no problem. Up until now, the problem of world hunger has been a problem of distribution. Francis Moore Lappe said as much in 1970 and she is still right. We have the food but it is not getting to the people who need it around the world because of greed and/or graft.

However, where is the tipping point where distribution ceases to be the problem and actual production becomes the problem? I suggest to you that we will reach that point sometime in 2011. The reasons are because of a shortage of wheat due to Russian drought last year, Canadian rains last year, a hard winter lowering yields on winter wheat in the US, and floods in Australia destroying the wheat harvest. Argentina is likely to have a good wheat year but inflationary pressures could negatively impact their exports.

Another factor that is being willfully ignored is the amount of fossil fuels available to farmers worldwide. As oil goes up in price, food becomes more expensive, simply because most food produced in the developed countries requires tremendous amounts of fossil fuels to produce, process and transport them. In addition, higher prices for corn (Corn prices are also going up, as well soybeans and other food crops!) reduces demand for ethanol and this deficit must be made up with liquid petroleum fuels.

So what is the point of all this? 1) Food prices are rising worldwide due to several factors. 2) Supply is decreasing because of weather-related events. 3)These two factors reinforce each other and argue for a nasty period of food riots in the next few months. 4) Distribution of food to quell the food riots will not be possible because of costs of transportation and lack of production. 5) Thus, the coming food riots will receive plenty of feedback which will keep them simmering.

Food security will likely become more important than either Iraq or Afghanistan in the coming months. Russia and India thought so last year when they both banned grain exports.