SO many potential subjects this week. There was Mervyn King’s Northern Rock
interview and the kerfuffle at the Treasury when he said Alistair Darling
had the final say (on King’s recommendation) in not supporting a Lloyds TSB
takeover of the troubled bank.
There was the Bank of England’s decision to leave interest rates at 5.75%. And
of course there was that pesky oil price, whose flirtation with $100 a
barrel was enough to push a litre of unleaded above £1 for the first time. I
remember my dad filling the entire tank of our elderly Hillman with leaded
petrol for £1.
I’ll come back to the Bank and oil. But I want to fulfil a promise by writing
about something else that is rising strongly in price, food.
Food prices in dollar terms are up by more than 30% on a year ago, according
to the Economist commodity-price index. The rise in sterling and most other
currencies is less, but still significant.
Associated British Foods, one of Britain’s biggest food manufacturers and
owner of the discount fashion chain Primark, says prices for four of its
most important food commodities – wheat, corn oil, malting barley and dairy
products – have doubled in a year.
In some countries such as Mexico and Italy rising prices for staple foods have
become a hot political issue. In all countries they have complicated matters
for central banks. “There’s little central banks around the world can do to
prevent food prices from rising,” Mexico’s central-bank governor, Guillermo
Ortiz, said last week. Mexico has just raised interest rates, as has
Australia, in response to the commodity-price boom.
Analysts at Credit Suisse First Boston point out that German food prices are
up nearly 5% on a year ago and will push euroland inflation to 3% in the
coming months, which could prompt a further rate rise from the European
Central Bank. As a frequent purchase, rising food may have more impact on
people’s inflation expectations than other goods.
In Britain, food prices were up by nearly 4% in September compared with a year
earlier, but milk, cheese and eggs prices rose 6% in that month alone and
margarine and butter were up 15%.
Why are food prices rising so strongly? They are highly volatile, driven by
the success of harvests, weather conditions and other short-term factors. A
shortage one year is often followed by a glut the next, as farmers respond
to the price signal and plant more of the crop for next time. So a sharp
rise in food prices in 2000-1 was followed by years of weakness.
Much of the analysis of current high food prices confuses these short-term
factors with longer-term trends. So the sharp rise in China’s inflation to
more than 6%, a 10-year high, is not due to the fact that Chinese consumers
have suddenly discovered meat. It has more to do with the fact that pork
supply has been hit by a nasty outbreak of blue-ear disease.
The Chinese, in fact, are already big meat eaters, with average consumption
per head close to that of Britain, and not far behind America. Half of the
world’s pigs, after all, are in China. This is not to say that rising
prosperity will not increase China’s protein consumption – it will – but it
is not happening overnight.
China, with 20% of the world’s population but only 7% of its farmland, much of
it poor quality, is perhaps the least appropriate nation to be developing a
greater fondness for meat. As Jing Ulrich of JP Morgan pointed out last
week, much of China’s production of corn and soyabeans goes for livestock
feed. It takes 5kg-7kg of grain to produce 1kg of pork.
A recent report from UBS, What’s Up With Food Prices, does a good job in
disentangling short-term from long-term factors. “While rising Asian
affluence or climate change are likely to have important influences on food
prices over time, recent price jumps appear to have more in common with
historic factors, such as poor harvests or animal disease, than they do with
21st century phenomena,” writes Larry Hatheway, the report’s author. “Even
demand for biofuels appears to have had only a modest impact on prices.”
This is confirmed by figures from the Department for Environment, Food and
Rural Affairs (Defra). Only 2.25m tonnes of wheat, 1.5% of EU production,
will be used globally for bioethanol production in 2007-8.
Even so, some long-term trends – a rising population of affluent people in
Asia, a gradual increase in demand for biofuels and the impact of climate
change – point to rising food prices over time.
There is an echo in some current analysis of the fears of the early 1970s,
when the Club of Rome think tank warned that we were heading for a
Malthusian crisis of insufficient food to feed the world’s growing
population. But, without going too far down that route, there will be
significant pressures.
There is also an important interaction between the high price of oil and
higher food prices. Expensive oil adds directly to the costs of growing,
harvesting and distributing farm produce. It also increases the incentive to
turn over crops to biofuels.
Some would say we have had cheap food for too long. The National Farmers’
Union notes that, if food commodities had kept up with inflation over the
years, wheat prices would be several times their current level. It is also
true that the impact of higher food prices is most serious in poor countries
– and for poor people in rich countries.
Increases in the price of commodities account for only a small part of the
rise in food prices. Defra calculates that bread prices need to rise by only
6% even if the doubling of wheat prices is fully passed on. Most of the cost
of the food we buy is in processing, production, labour costs, transport and
margins.
But to return to where I started, rising food prices – like the high price of
oil – are something the Bank could do without. It is possible that these
high prices will be balanced by lower prices for other goods and services,
but that is asking quite a lot.
The Bank will probably say in its inflation report this week that it left
interest rates unchanged because the downside risks to growth were balanced
by upside risks to inflation. “Agflation” – those rising food commodities –
won’t give us stagflation but they could complicate things. The danger is
that internationally generated food and energy-price increases keep
inflation and interest rates in Britain too high for comfort, preventing the
Bank from responding to the slowdown.
PS: I am a great fan of BBC Radio 4. But I felt like Disgusted of
Tunbridge Wells the other day when I listened to the Thought for the Day
slot. In it, Martin Palmer, secretary-general of the Alliance of Religions
and Conservation (founded in 1995 by the Duke of Edinburgh) was opining on
the credit crisis.
It was, he suggested, all down to “usury” and that Christianity had changed
tack – like Islam and Daoism (or Taoism) it had once opposed the charging of
interest on money. “Sadly, Christianity started abandoning its opposition to
usury in the Reformation in the 16th century, so opening the floodgates to
capitalism,” he said.
Note the floodgates. Note also what he said a couple of sentences later: “You
see, if people want more and more, it can only lead to disaster.” At a time
when the government is concerned about the kind of message young people are
getting from inflammatory clerics, this kind of barking message from the
Radio 4 pulpit is worrying. If people didn’t want more, that really would be
an economic disaster.
Anyway. Lots of entries to my Freakonomics competition – films that had
real-life consequences – are coming in. Martin Dedman reminds us that the
Mrs Miniver stories, and the 1942 film starring Greer Garson, hardened
American attitudes against Germany. Churchill said it did more for the
Allied cause than a flotilla of battleships. I will review all entries in a
couple of weeks. There may even be a prize.
david.smith@sunday-times.co.uk
