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Gloomy Malthus Provides Food For Thought
As World's Appetite Builds

By Liam Halligan

07 March, 2011

Everyone knows that economics is often labeled the “dismal science”. But few could tell you that this pejorative description dates back to an insult originally thrown at the classical economist, Thomas Malthus.

For it was Malthus who, in a path-breaking 1798 essay, grimly observed that populations expand geometrically while food supplies increase only arithmetically. In other words, mankind faces serious problems because population growth, by definition, will eventually outstrip the planet’s ability to provide food.

At some point, argued Malthus, the demands of the human race will exceed agricultural capacity, sparking violence, population decline and radical social change. A highbrow version of the man with the “End is Nigh” sandwich board, Malthus banged his “impending catastrophe” drum until his death in 1834 – hence the “dismal” sobriquet.

Since then, the world population has risen 5-fold, to 6.8bn people. But new technology has delivered better irrigation, powerful fertilizers and pesticides – boosting land yields and proving Malthus seemingly wrong. Perhaps the gloomy old boy wasn’t wrong, though, just ahead of his time. For in the last few years, as population projections have spiraled, and food prices with them, Malthus has started to look pretty smart.

The United Nations index of global food prices hit yet another record high in February – the eighth successive monthly increase. The respected UN index - which tracks prices of cereals, meat, dairy, oils and sugar – is now up 40pc on a year ago and 5pc above its June 2008 peak. The price of corn – a widespread staple crop – is now 95pc higher than a year ago. While there were many factors behind the outbreak of dissent in Libya, soaring food prices were the catalyst. A wave of price-related resentment has swept across a number of North African nations and could yet cause a political eruption in the Gulf.

Since before the days of Malthus, economists have tracked the natural swing and counter-swing of food prices, as production has responded with a lag to price signals and the vagaries of the weather. But maybe Malthus was right and that self-correcting cycle is now over.

The world population has surged 18pc since 2000. Meanwhile, except during the global financial crisis of late 2008 and early 2009, the cost of food has steadily risen. The suggestion is that, just like the market for oil and metals, food and other “soft commodities” have become locked in a “super cycle”, the implications of which are only just beginning to be understood.

Even the deadly-sober, politically constrained economists at the International Monetary Fund now admit that something might be up. The recent food price surge stems partly from temporary factors such as last summer’s drought in Central Europe, argued an IMF article released last week. But the main reasons relate to “structural changes in the global economy that will not be reversed”, which means “the world may need to get used to higher food prices”.

The US Department of Agriculture has also weighed-in last week, forecasting even higher farm-gate prices for corn and wheat during the 2011 harvest season, given that the tightness of soft commodity markets. That means “policymakers … will need to confront the challenges posed by food prices that are both higher and more volatile than the world has been used to”.

This trend, as with so much else these days, is being driven by the rise of India, China and the other large emerging markets. As incomes in these hugely populous countries keep rising, their new middle classes are rapidly shifting from a vegetable to an animal-based diet. Meat is an extremely crop-intensive form of protein, as any vegetarian will tell you. So this massive wealth-driven Eastern diet-switch is fuelling the demand for soft commodities.

In addition, we’ve embarked on a biofuels revolution - reaping energy from crops. Over the past six years, as global energy use has escalated, the output of oil and other fossil fuels has barely responded – not least due to looming supply constraints, as the world’s big oil wells deplete, with very few new crude sources coming on-stream. Biofuels from grain, sugar and oil seed are now starting to plug the gap.

Accounting for 2.5pc of global energy use, biofuels are now serious business. Boosted by huge Western government subsidies, they’re set to meet more than 10pc of global energy needs by 2030. The trouble is that biofuels are shifting land use away from crops for food – which, in turn, is pushing food prices up. The extent of this land shift is uncertain. But a recent Friends of the Earth report said that in Africa, the European-led biofuels land-grab is “under-estimated and out-of-control . . . causing conflict and threatening food-security”. So even mainstream environmentalists now feel that biofuels, designed to lower our hydrocarbon addiction, are actually counter-productive given their impact on food.

Most mainstream economists – perhaps scared of the “dismal” label - remain sanguine about global food markets. While they recognize that oil is subject to finite supply constraints – there is only so much crude in the world – they feel that because food can be grown, there is no long-term problem.

I accept that there are vast areas of the world – Russia and Africa, for example – that could theoretically raise their agricultural output. But it is vital to understand that food production itself is also a very energy-intensive business – itself highly-reliant on oil. From the fertilizers and pesticides used to treat the earth, to the machines needed to sow, reap, process, package and distribute goods to market, crude features extremely heavily in the global food supply-chain.

As a UN report commented last week “rising oil prices could further exacerbate an already precarious situation in food markets, adding even more uncertainty to the price outlook just as plantings for crops in some of the major growing regions are about to start”.

Not only by encouraging the switch to biofuels, but also by exacerbating food production and distribution costs, high oil prices can drive up food prices too – even though only oil is non-renewable. Last week, global oil markets tightened further, with Libya’s production now down at least 1m barrels per day – around 1.3pc of global production. As a result, futures contracts scraped $120 a barrel and UK petrol prices climbed above £1.30 a litre.

In the coming months, rising oil prices will bid up food costs further. More expensive food, in turn, could spark yet more unrest in the world’s oil-producing hot-spots. What we are witnessing in global commodity markets cannot be dismissed as “speculation”. These price rises represent the reassertion, after a credit-crunch induced hiatus, of long-term “structural” trends.

The analysis above poses some very serious questions for energy-importing nations like the UK. Addressing them will take years, decades even. Here and now, though, we need to accept that in the months to come, among rising fuel and food costs, inflationary expectations will soar. This week, the Bank of England’s Monetary Policy Committee must decide if it will grasp the nettle and raise interest rates. With CPI inflation having been above the 3pc “upper limit” for 20 of the last 36 months, and commodity prices set to send the index into orbit, further delay will leave the Bank’s credibility in tatters.

None of this is good news, of course. Some readers will accuse me of being miserable – even if they suspect I’m right. But that was good enough for Malthus. So it’s good enough for me.

© Copyright of Telegraph Media Group Limited 2011




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