Pretty lame, isn’t it? I mean, pretty much everyone knows that the price of food is already rising. It’s really quite a do-nothing hypothesis when you think about it. “The price of food will rise”. Is that it? Stating the obvious? Does that kind of statement make a guy some kind of economic wizard? No. But I must say this, on the anniversary of Copernicus’ birthday: stating the obvious worked for him.
The reason why the simple statement “the price of food will rise” is so important is not the statement itself. Saying “the earth rotates around the sun” is not, in itself, earthshaking. It’s what follows thereafter. All of a sudden the orbits of the inner and outer planets make sense. When you see the obvious, sometimes other facts that are difficult to reconcile become reconcilable.
The Price of Staples Will Rise
We all know that the price of food is rising, but we’re also hearing about droughts causing crop losses in the US and now Russia is feelingthe pinch, too. With the world’s biggest corn producer and the world’s biggest wheat producer putting out fewer crops, economists have already been able to project that beef, for example, will likely be more expensive toward the middle of this year due to the raising price of feed grain. With more droughts happening lately, the pressure on staples will be constant, and while we can’t necessarily say that the base price of staples will go up, it will fluctuate higher and, on average, be more expensive. When this happens, the meat downstream becomes more expensive by extension. Keep it in the back of your mind now that Russia has shut its doors to grain exports – likely until June – and many previously self-sufficient countries (I’m looking at you, China) are no longer self-sufficient. India is another case where, while they appear to have food under control, the per-person consumption of food calories is lower than in many other food-importing countries and I fear that lowering these calories-per-person is simply not something the Indian market can absorb. Americans can stand to eat fewer calories. Indians may not be able to. Will feed lots be profitable anymore if grain becomes too pricey? Perhaps there will be a rise in grass-fed cattle, which will increase demand for range land. Either way, the meat gets more costly and land gets more scarce. Mid-term result of grain no longer flowing from Russia? The Maghreb, one of the main importers of Russian grain, may have even more unrest to deal with. Watch Egypt.
Inflation Will Rise
The majority of the world spends the majority of its pay on food. North Americans and Europeans are something of an anomaly that way. I’ve already mentioned that inflation in China is on the rise, and when I left China, inflation was high – until they changed the proportions of goods in the grocery basket used to calculate inflation. In effect, inflation in China is a shell game: they don’t want the official number to be too high, so they change the make-up of the products it’s based on. The items they reduced in the basket: food. Sadly for the central government, the people know what’s going on, because they are spending most of their pay on just that. Salaries are going up to cover food price increases. Workers would not go back to the factories after the economic crisis for the same pay they worked for prior. Workers are desperate for enough cash to pay for food – and I’ve already argued that food determines the base price of the workforce. If the cost of food goes up, the cost of work goes up, and food-importing countries will be impacted more. This is one place where the First World worker has the advantage: we can absorb a price rise in food. Others cannot. In the long run, scarce food may start to make us more competitive than we currently are.
Trade Imbalances Will Shift and Potentially Reverse (eventually)
The Chinese have a long memory, and the Opium War is almost a current event on the time scale of that ancient civilization. To oversimplify the reasons China and England became embroiled in this one-sided conflict, we can say that there was a massive trade imbalance between the two countries. In effect, China grew tea and England bought it for gold. The natural problem being that tea can keep growing forever and gold is finite. In order to reverse the flow of bullion, England started assisting opium dealers in trading a different plant product for precious metals. This made the Chinese angry, and they started burning things. That gave the British the opportunity to go in and blow things up, and make the Chinese take the opium – illegal or no. To sum up, trade imbalances make people touchy. Currently, the Chinese hold a trade imbalance against the US which – to a degree – works in both nations’ favour. The Chinese are building an enormous pile of US dollars (not having learned anything from the Opium War, I suppose), and the US gets cheap goods and an endless supply of loans. Once food becomes more expensive, however, the flow of those dollars will slow. This will not require gunboat diplomacy, drug running, or any other kind of shenanigans. It will occur naturally as a consequence of more expensive staples. While there will be volatility in the staples market as the US and Russia have alternating bumper/poor crops (this hurts only the farmers, though – everyone else is more or less unscathed, but farmers start killing themselves when prices do this), eventually the average price of staples will rise. China will be unable to increase its own internal staple production to meet its needs due to overuse of chemicals, lack of groundwater, and desertification. With the relaxing of restrictions on domicile imposed by the hukou system, farmers will start moving to the city in droves. Who once were productive farmers will become consumers in the food system, and leaving large tracts of land to be turned into real estate deserts. I contend China’s food production will never rise in a meaningful way unless a miracle happens and they all of a sudden have a Green Leap Forward. Not bloody likely, but I remain open to serendipity.
This means there are implications for Chinese productivity. Its growth once predicated on cheap unskilled labour, the cost of hiring in China will rise with the price of food. The same kind of production will become untenable in China. Foreign investment – already seeking alternative places to flow such as Vietnam and the Philippines – will threaten to dry up. What may this mean? It may make China blink on monetary policy. One option would be to allow the Yuan to float, the other option would be to unilaterally have the Yuan to rise in value against the dollar. Trade imbalance is going to force changes in monetary policy one way or the other, but this one thing I will say: do not underestimate the power of the US dollar. While its value is more or less based on the fact that it is the global fiat currency for petrol purchase (and the reserve currency for many other international transactions), even in an era of decreasing oil demand due to high price, the USD will retain value because we’ll be buying grain with it – or at least the Chinese will be.
Will there be a grain war? A more exciting reporter than I might say “maybe”. I say “no”. Will there be very boring high-level discussions about monetary policy amongst the grand high mucky-mucks of the Chinese Communist Party and Indian Cabinet? Yes. They may even get into heated arguments. I know. Perish the thought. We live in such turbulent times.
And then There’s the Death and Famine
Oh yes, I forgot. The over billion people that live on between one and two dollars a day will go hungry in droves. This will not have an economic impact on you. I guess you can decide for yourself whether this issue matters to you or not.
The Copernican Economic Shift
So once the economic shift begins, several bets are off. One may be the direction in which trade imbalances begin to flow. Another will be the ability of China to retain its growth in manufacturing centres. Will China shift its monetary policy? Will arable land become a highly desirable asset class? I think there are strong chances of these things happening, if only moderately, in the coming years. One thing I think is a certainty is the increase in the cost of arable land due to interest not only from investors but other states scrambling for the single most important strategic resource in any nation’s arsenal: food. As the old yarn goes, “buy land – they ain’t making any more of it”.