Food price surges and the economy’s natural limits

This is the first of two linked posts. The second one is here.

Food prices surged to record highs twice in the past five years – in 2007-08, before the financial meltdown, and again in 2010-11. There seem to be several sets of causes: (i) long-term increases in costs, caused by dearer oil (for transport) and gas (for making fertiliser),  relative shortages of land and water, and a slowdown in productivity improvements; (ii) the frenetic increase of financial activity around agricultural commodities markets, and the speculation it generates; and (iii) legacies of corporate agriculture’s dominance and the subjugation of the global south. After the 2007-08 price surge, world yields of basic foodstuffs hit records in 2008 and 2009, which helped to refill warehouses – but, despite this, a series of bad weather events in 2010 sent wheat and coarse grains prices spiralling upwards, already-thin stocks ran down, and in February 2011, the index of international food commodity prices kept by the UN Food and Agriculture Organisation (FAO) hit a new record high. The FAO, in a report issued jointly with the Organisation for Economic Cooperation and Development (OECD, the “rich countries’ club), reckon that basic food prices will be significantly higher in the next decade than in the last decade.[1]

Much anger has been expressed by left-wing commentators, civil society organisations and even UN bodies about the damage done by financial speculation. During the price surges, it almost certainly made international prices more volatile and pushed them higher than they would have gone otherwise. But this article will focus on the more substantial, underlying causes of food prices rising over the long term – many of which stem from the way that the world food economy, lorded over by the corporations and industrial agriculture, is coming up against natural limits (reflected in oil prices, stagnating yield gains, etc).

If these natural limits really are playing a part, that is an important sign of how they are impacting on the capitalist economy. And if the changes really are for the long term, then one result could be the end of cheap food supplies, enjoyed by urban populations for a generation, which will surely be an important turning point in the class struggle.

Here I’ll try to summarise the conclusions reached by researchers about the three sets of causes mentioned above, and then suggest some conclusions. A second, linked post here covers financial speculation: briefly, I think that while speculation caused price volatility and exacerbated price rises, the underlying causes of price rises discussed in this post are no less important.  

Cost- and production-related causes of price rises

Oil and inputs prices. A study of the food price hikes in 2007-08 by IFPRI, a pro-market think tank, concluded that rising oil and gas prices were “a strong factor”. It found that in the USA especially, agriculture relies almost entirely on oil-based transport, and that on international markets, oil prices started rising before agricultural commodity prices, suggesting a causal relationship. It also noted that fertiliser prices rose twice as fast as cereal prices in 2005-08, and that up to 90% of the cost of making nitrogen fertilisers goes on natural gas, which is used as a raw material.[2] 

But are oil prices going to stay high? The forecasts are almost always wrong. But it’s worth making two points. (1) Oil prices reached their peak ($147/barrel) in July 2008, just before the financial crash, then sunk fast to $30/barrel – but rose again to around $80-100/barrel, and stayed there, despite the fact that the world economic recovery was judged to be anaemic, and widespread fears in the ruling class (continuing up to now) that another world recession is imminent. (2) There seems to be a consensus among energy economists that in future decades companies will find oil harder (and therefore more expensive) to get at than in the past. That reflects natural limits. Thus the International Energy Agency, which represents the largest oil importing countries, estimates in its latest report that by 2025 oil imports will be costing between $105/barrel and $120/barrel, depending on whether or not governments act to diversify away from fossil fuels. In other words, over the long term, they don’t think oil prices are going back down.[3]

An important agricultural input not linked to oil is fishmeal for animal feed. And that comes from fishing, an industry that has already come up against natural limits repeatedly.

Land and water. The OECD/FAO says that there is a long-term trend towards “the loss of good-quality cropland”, particularly as agriculture competes with urban development in river valleys, and that this will continue. It also counts, as a cause of rising food prices, water stresses – which it reckons could affect up to 47% of the world population by 2050, will increasingly constrain agriculture.[4] 

Biofuels production. The IFPRI researchers say there is “little doubt” that biofuel demand in the USA has a big impact on maize prices and probably on soybeans too, while European oilseed production has increasingly affected wheat markets. This will continue, the OECD/FAO believes: by 2020, 13% of the world’s coarse grains, 15% of vegetable oils and 30% of sugar cane could be going to biofuels, a trend that will be intensified by higher oil prices.[5]

Global warming. A wealth of research has already shown how warmer and more volatile weather negatively affects farmers in Africa, south and south-east Asia, and other tropical areas. The OECD/FAO’s summary was that global assessments have been able only to “foresee potentially higher prices, in part through higher costs associated with worsening conditions in arid and semi arid regions where agricultural production is already difficult”.[6]

Slowing yield growth. The OECD/FAO warns repeatedly that agricultural productivity growth is falling – in other words that yields (the amount of food produced per hectare of cultivated land) are improving much more slowly than in the past. “Productivity growth, as measured by growth in crop yields, has been on a downward trend over the past ten years”, it states. This will “continue to exert [upward] pressure on international prices”.[7]

This slowdown in productivity growth is attributed to a range of causes including “limited input application because of high costs [mainly of fertiliser]”, “the expansion of planting into less suitable areas” (reflecting land constraints), “some increases in land under high-cost irrigation” and other water constraints. Another long-term trend, though, is the falling efficiency of fertiliser inputs. The methods of corporate industrial agriculture that rely on ever-greater quantities of fertiliser per hectare are not only causing serious environmental problems (mainly, disrupting soils’ nitrogen balance and polluting bodies of fresh water), but are also becoming less and less efficient. This amounts to a serious crisis for industrial agriculture, and is an important subject in its own right.[8] It is also likely to be an underlying cause of higher food prices.

Of course the cost to agricultural producers of transport, fertilisers and other inputs only reflect the prices that energy companies, fertiliser manufacturers etc charge. Environmentalists and liberal economists argue that, on top of these, the costs of environmental damage that are “externalised” by the economy – most significantly, the long-term cost of global warming (although, in agriculture, the ecological damage done by fertilisers is another sizeable issue) – should be covered by a carbon tax and/or other similar instruments. It seems unlikely that rich country governments will rush to adopt any such measures, but, if they did, one consequence would presumably be further knock-on effects on food prices. 

Market-related causes

Together with these cost- and production-related factors, research on the 2007-08 price surge shows that some market-related factors both exacerbated price rises and caused price volatility, i.e. rapid and unpredictable fluctuations in prices that are potentially as damaging as price rises to poor consumers. The main market-related factor was the entry of billions of dollars of speculative financial capital into international agricultural commodity markets, covered in a second, linked post here.

In addition to financial speculation, currency movements – and especially the devaluation of the dollar, the main international trading currency, in 2007-08 – put upward pressure on international food prices.

Another key issue was the rundown of agricultural stocks over the past 20 years, which meant that when shortages were feared, governments’ ability to intervene by releasing extra supplies on to the market was limited. The OECD/FAO said that stocks for most cereals had “decreased significantly”, as governments moved away from holding public stocks, that they were “clearly insufficient to offset the production shortfalls” in 2007-10 – and concluded that there is a “strong inverse correlation” between stock levels and commodity prices.[9] The lack of reliable public information about the level of stocks is a problem, too.

A half-century of context

In the background of the recent surges in food prices are deep-going changes to world agriculture since the 1960s. Two socialist writers on agriculture, Fred Magdoff and Brian Tokar,[10] summed up these changes as:

— World per capita grain production reached a plateau in the 1980s, and then started to fall, while steadily increasing proportions of grain and soybeans are diverted for use as animal feed, to produce meat. (As much as 95% of calories are lost when grain and soybeans are used for meat production.)

— The drastic changes to international trade rules that have opened up developing countries to “free trade”, meaning (i) that their farmers had to compete with state-subsidised industrial agricultural corporations in the rich countries, and (ii) that developing countries became increasingly dependent on imported food, much of it from the rich countries. This has been a big factor in reducing food production in these countries, and in switching land use to grow food for export instead of for domestic markets. These processes were pushed along in the last quarter of the 20th century by “structural adjustment programmes” forced upon developing countries by the IMF and World Bank.

— The driving of hundreds of millions of peasants in the developing world either off the land completely, into cities where they are dependent on commodified and/or imported food, or at least into a complicated and precarious existence combining some subsistence farming with other types of work.

— The concentration of ownership and control of all aspects of food production – from seeds, pesticides and fertilisers to grain elevators, processing industries and shops – by large multinational corporations.

These changes, which intensified in the 1980s and 1990s under the political domination of neo-liberalism, went along with a long-term period of low agricultural prices and of relatively low food prices for consumers. Philip McMichael, a socialist writer on development, argues that this is now coming to an end: “An initial lowering of food prices that led to the destruction of small [agricultural] producers has now led to agflation under increased global monopolistic control of world food supplies. Indeed, under such conditions of ‘corporate liberalisation’, global transmission of the food price inflation was automatic.”[11]

Some conclusions

From the evidence summarised above, it seems that the corporate industrial agricultural behemoth – which has in the past half-century established its dominance over world food production, damaging developing countries’ economies, wrecking the lives and livelihoods of hundreds of millions of peasants, and exacerbating hunger that now affects a billion people – is coming up against natural limits, and this will increasingly be a factor in its further expansion in the future.

This collision with natural limits is one of the factors that has driven up food prices, and suggests they may remain high and/or rise further.

However, corporate agriculture will continue to “externalise” both the environmental and social costs of its activity for as long as it can, and will continue to expand, with further damaging consequences. That point is made in a recent article by Tony Weis, a socialist writer on the global food economy, who argues there are un- and under-valued costs to industrial agriculture, including wreckage of the biosphere and, above all, cheap oil inputs. The natural limit that will prove decisive is peak oil, he believes. Oil prices will rise, he writes, confounding common assumptions about agricultural production efficiency – but he also acutely points out that the pressure of demand (for more grains, in the first place for meatification of diets and biofuels) is more than countering the constraints on supply (i.e. peak oil and the price rises that reflect it).

His conclusion: “While the accelerating biophysical contradictions of industrial capitalist agriculture constitute a crisis of potentially catastrophic proportions, they are not yet destabilising the logic of its dominant actors. On the contrary, industrial capitalist agriculture has been reinforced, as demand pressures for industrial grains and oilseeds associated with the biofuel boom and the continuing meatification of diets are trumping the cost pressures from peak oil, while climate change has so far spared aggregate levels of productivity.

“For an indeterminate period, then, we can expect the dominant actors to attempt to manage the system in some nuanced form of the status quo (through technology, legislation, more coercive labour regimes, etc), as biophysical problems and inequalities intensify, producing ‘a great variety of morbid symptoms’ [there he’s quoting Antonio Gramsci].”[12]

Weis reckons that many of the arguments about the superiority of large-scale agriculture are fallacious and would not stand up, were its biophysical impacts taken into account. He writes of the need to remake radically capital-intensive and “knowledge-dispersed” agricultural systems, looking to systems in which small, sustainable farms play a big part. This is “bound to be derided by some as backward-looking”, he notes.

To my mind, an important X-factor here is the impact on urban populations of food price rises. Relatively cheap food was a huge part of working-class life in both developed and developing countries in the quarter-century up to the 2007-08 price surge. The food riots that broke out in 37 countries as a result, some of which merged in complex ways with the “Arab spring”, may give an indication of just how important this has been to working-class households and of the type of social movements that may be triggered if the age of cheap food really is at an end.

Perhaps at some point urban social movements over living standards, and movements over the future of agriculture, will merge. Let’s hope so. As Weis writes: “Far from fading away into modernity, struggles over agriculture are bound to intensify as the promise of cheap industrial food breaks down, and might well come to occupy a pivotal place in broader anti-systemic movements at the precipice of mitigation and adaptation or climate change disaster.” GL.

[1] OECD/FAO, Agricultural Outlook 2011-2020, p. 24. (This is the latest in a series of annual reports.)

[3] IEA, World Energy Outlook 2010, p. 103.

[4] OECD/FAO, Agricultural Outlook, p. 61

[5] Headey and Fan, Reflections, p. 32; OECD/FAO, Agricultural Outlook, p. 15.

[6] OECD/FAO, Agricultural Outlook, p. 56.

[7] OECD-FAO, Agricultural Outlook, pp. 15 and 26-27.

[9] OECD/FAO, Agricultural Outlook, pp. 35-36

[10] Fred Magdoff and Brian Tokar (eds.), Agriculture and Food in Crisis: Conflict, Resistance and Renewal (Monthly Review Press, 2010), p. 10.

[12] Tony Weis, “The Accelerating Biophysical Contradictions of Industrial Capitalist Agriculture”, Journal of Agrarian Change, vol. 10 no. 3 July 2010, pp. 315-341.

2 Responses to Food price surges and the economy’s natural limits

  1. […] [6] For earlier People & Nature commentary on food prices, see here. […]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: