More on "Agflation" (Rising Food Prices)

Emma Rowley writes in The Telegraph:

What we are seeing represents the third major rally in global grain and oilseed prices in just half a decade. 

Worse is to come, new research warns. World food prices look set to hit an all-time high in the first quarter of next year – and then keep rising, according to the analysis from Rabobank, a specialist in agricultural commodities. 

By June 2013, the basket of food prices tracked by the United Nations could climb 15pc from current levels, according to the bank's analysts. 

"The coming year will see the world economy re-enter a period of agflation as grain and oilseed stocks decline to critically low levels, pushing the FAO [Food and Agricultural Organisation] Food Price Index above record nominal highs set in February 2011," they say. 

. . . 

"Politics and economics are inextricably linked as exemplified by the Arab Spring, which was preceded by a rise in food prices," note Hermes fund managers in a recent report. 

But no crisis looks quite the same as the last. Rabobank thinks the consumer impact could be less painful this time around compared to 2008, when there were severe shortages of wheat and rice.

And more:

More specifically, the scarcity of feed crops is expected to have major repercussions for the meat and dairy industries, as the increase in the costs of feed stocks raises the prices faced by consumers and hits profit margins.

Previous posts on the same topic are here, here, and here. Here there is an critic of Tyler Cowen's NYT article. Here there is a post by Ángel Martín Oro (in Spanish). The discussion on agriculture, development, and agflation is getting increasing attention.  

HT: CL.

Research tribune

The effect of education on crime (in the UK). 

The effect of crime on economic growth. 

. . . [W]hy caste remains a persistent feature of the Indian marriage market.

Impact of rising world rice prices on poverty and inequality.

Universal health care in Thailand. 

Determinants of China's Outward Direct Investment. 

HT: Maximo Rossi and Mark Lee. 

Agriculture and development

Tyler Cowen mentions in this podcast (about his book An Economist gets lunch) the importance of research in agriculture in developing countries. 

Research on agriculture matters because it can lead to improved productivity, which is essential to counteract the high volatility in food prices - which has happened often recently leading to social instability. 

Source of graph.

This paper published in the new number of Economic Systems (March 2102) provides an excellent review of the literature on agriculture and development. The discussion on the Green Revolution possibilities, especially for Africa, is very good as well as the discussion on the new approaches in rural development. The article also talks about the role of the government in the provision of public goods in agriculture (such as funding research and building rural infrastructure), it also emphasises the role of the private sector and possible public-private collaborations. The review of the literature is quite complete since the early developments in mid-twnetieth century to date (e. g. the work of Nobel Laureate Theodore Schultz). 

From the abstract:

It discusses in turn the role played by agriculture in the development process and the interactions between agriculture and other economic sectors; the determinants of the Green Revolution and discuss the foundations of agricultural growth; issues of income diversification by farmers; approaches to rural development; and finally issues of international trade policy and food security which are at the root of the crisis in agricultural commodity volatility in the past few years.

From page 45:

In poor countries, agricultural growth has a huge capacity to reduce poverty. Due to this potential, improving productivity in the agricultural sector in developing countries is critical and an essential step to reach the Millennium Development Goals. Some 75 percent of today‘s poor living in rural areas would benefit massively from higher incomes in agriculture. Moreover, agriculture also has the potential to generate economic growth in developing economies that depend to a large extent on this sector, for example in many Sub-Saharan African countries. But this presupposes major increases in productivity that depend on a range of factors—new technologies and their adoption; farm size and access to land; overcoming environmental challenges—for which we do not have ―silver bullet‖ solutions. The most difficult challenges are institutional and are related to market failures, missing markets and property rights.

See the full draft here (Jan 2012). 

Understanding food crisis

The case of Malawi. In this article Ellis and Manda (World Development, 2012) argue that  food crisis are the result of market forces and government policies. Nothing new here. The richness is in the details however and the authors do a good job at explaining them. 

In page 1414 they say referring to the market: 

In seeking to understand how this particular pathology keeps replicating itself every few years in Malawi, a first point to note is that market prices are the most accurate single indi- cator of the true maize availability position in Malawi at dif- ferent points of the year. The maize market in Malawi is fundamentally a competitive market, with plentiful and di- verse traders operating in it, and efficient spatial arbitrage reflecting local surpluses or scarcities (Myers, 2008). The mar- ket price is a more accurate predictor than production esti- mates that seem to have performed variably in indicating the true volume of maize available from the domestic harvest from year to year. However, the market price is not utilized as a crit- ical indicator in food security analysis in Malawi. Rather the emphasis is on the forecast maize harvest figure, the crop esti- mates for substitute foods (rice, cassava), the stock position, food aid operations, and localized vulnerability identified by MVAC investigatory procedures.

And to the government:

Second, most government reflex action exacerbates sea- sonal price instability in a deficit market as predicted by the “Jayne hypothesis” stated in the introduction to this paper (Jayne et al., 2006). Aggressive procurement by ADMARC or NFRA in a short market increases upward price pressures when supply is limited. Prohibiting private trade has the same effect, since it reduces spatial arbitrage, and reduces the volume of informal cross-border trade (handled entirely by private traders). In all maize shortage episodes of the 2000s, cross-border import trade helped diminish the shortage of domestic supply to a significant degree. In all episodes government openly charged the private sector with excess stock holding (“hoarding”), and efforts to get this stock released through punitive action failed to add significantly to supply.

The article is here.