By Thomas

Food prices.china riots photo

There is the basic problem with prices that they only say something about what happens on the margin. This is especially true with food. Shortfalls in supply give rise in prices out of proportion to the amount produced. The demand is inflexible: People gotta eat!

This gives the consistent problem with agriculture. When prices are high all farmers want to expand production and land prices rise. Farmers invest in land and machinery – this generally increase production – then prices drop. This leads to the most entrepreneurial farmers get into the deepest trouble: They are saddled with the high debt and poor prices.

Fluctuations in interest rate make things worse. What is interesting – for the farmer – is the yield of the land relative to the capital cost. When interest rate is low the land prices high – this can be faced with peace of mind – when food prices are on the rise.

Thus food prices have an inherent nervous disorder: When things go bad for the farmer – they are just about to go well – and vice versa. This doesn’t mean farmers complaints are not to be taken seriously or they shouldn’t be helped in times of hardship; but it means that they should pay back that help in good times. The result for the rest of the population is lower food prices in the long run, as the rationalisations WILL come through eventually.

Now food prices are on a higher level – roughly twice what they were 10-20 years ago. I’ve taken some of the more basic crops as they will reflect other types of food.  Either they are bread or fodder. As you see there is not large divergence except in the later years.


price of basic staple goods chart

Now food prices are on a higher level – roughly twice what they were 10-20 years ago. I’ve taken some of the more basic crops as they will reflect other types of food.  Either they are bread or fodder. As you see there is not large divergence except in the later years.

But at the same time there has been inflation, that about doubled the general consumer price level between 1981 and 2001. This means that in real terms the price about halved in those 20 years. The latest price rise to about 2½ times the level of 1981 just restores prices to what they were some odd 30 years ago.

Food prices are going to rise from the present level simply due to the increased wealth in China. China cannot feed itself – especially on a better diet than they were used to. A pound of meat takes 3-4 pounds of grain to produce, so more meat on the table means more grain consumed for the same pleasant feeling of a full stomach.

We can see that especially rice and corn have zoomed up. Now they eat a lot of rise in China and their porkers eat a lot. Will the Chinese farmers not produce more? Certainly; but the question is rather if the total production in China can grow with the same speed as the productivity of the farmer?

Considering the jumps in rice prices – it doesn’t seem likely. Eventually and increasingly China will have to import food – either in the form of grain or meat. That will jerk up prices. That will give them a major problem: In export it is an advantage to undervalue your currency; but if you import then overvaluing is much better.

Now in theory the market should even out such a transition in exchange rates; but that is exactly what China has been trying (like everybody else) to sabotage by undervaluing their currency and extending huge credits in foreign currency. Now a total reversal in politics will slap China twice:

a)      It will poison the recovery of their exports. Partly from the higher prices they will charge, partly because the low wage level cannot be maintained due to rising food prices. That China increasingly will have to import energy at (possibly) rising prices will NOT help them.

b)       Their fortunes of USD will immediately be slashed. If from undervaluing with 25% you go to overvaluing with the same amount. Then you cut your fortune with 40% – OUCH.

The same thing with gold: The price you pay for it accumulating it – is far from the price you get when you have to sell.

What is more: The rising food prices will not put more money in the Chinese farmers pocket – they will go to pay off his debt incurred with mechanisation, so the internal market for consumer goods is not going to come – there is rarely money in selling cars to unemployed industrial workers.

For the rest of the world: Well especially the USA can take it reasonably calm. As the largest food producer in the world the USA will experience better prices on higher volumes of export. At the same time the US (and Western in general) industry will be rid of an unfair competitor. It will make jobs in the West and the US eventually; but not to the same extend they disappeared:

1)      Production will be more rational. The featherbedding of the autoworkers in Michigan will remain gone – other plants will rise with a considerably smaller workforce pr. horsepower.

2)      The production of industrial goods will be lower, as consumption has been fuelled by dumping prices and extended credit. You will have to buy at what it really costs – and cash.

How that plays out is difficult to see: What wages will be earned by how many and at what prices?

We are in a fundamental shift and all bets are off.