Global economy supplement: the cost of food

Food prices have moved substantially in the course of the last decade. The single most important short term influence on wholesale food prices is the price of oil—not the edible type but the black sticky stuff over which wars are fought. Making artificial fertiliser is very energy intensive and it is the cost of fertiliser that affects food prices at the margin. The oil price soared between 2006 and 2008 and food prices rocketed too. Rice rose by 217 per cent, wheat by 136 per cent and soy by 107 per cent. The effect of rising energy costs was further exacerbated by the diversion of crops and acreage to the production of biofuels. Combined with anxieties about climate change and soil degradation this produced widespread fear of a “commodity supercycle”—a long, upward trend in prices.

If there really is such a thing, it certainly went into remission with the recession that followed the financial crisis. Within less than a year of coming close to $150 a barrel, oil was trading in the mid $40s and food prices had accompanied it down. They subsequently rose again, peaked in 2011 and have now fallen back. This year, in spite of steep rises in the price of some minor commodities such as cocoa, two important staples—wheat and corn—have continued to fall, by 28 per cent and 23 per cent respectively. The weakness in the oil price suggests that overall pressure on wholesale prices is likely to be modest.

In poor countries it is mainly the price of raw commodities that determines food prices. Consumers in rich countries are at the end of a long value added chain of processing, packaging and branding. Even with a 70 per cent rise in the price of cocoa butter this year, Hershey’s, the world’s biggest producer of chocolate, is planning to raise its prices by only some 8 per cent—a price rise which retailers may well choose not to pass on. In the United Kingdom, the effects of the current supermarket price war are likely to overwhelm changes in raw material prices.

The longer-term influences on food prices are very different, and difficult to disentangle from the effects of the ups and downs of the economic cycle. The change in dietary habits which goes with increased affluence increases pressure on resources. Animals are inefficient converters of food. It takes about 7kg of feed grain to produce 1kg of beef and a shift towards consuming more meat, seen in much of Asia, puts relentless pressure on resources.

But the development of artificial fertilisers transformed yields and made it possible to bring into production land which previously was not viable. It is in the area of creating new crop varieties, however, that the future looks most interesting. In spite of the publicity given to “Frankenstein” foods and transgenic organisms, it is further developments in more established technologies that are currently moving the frontier forward. Mutagenesis, the deliberate altering of genetic information—first developed in the 1920s—is widely used and more than 2,700 mutation-derived crop varieties have been obtained worldwide in the last 60 years. More recent developments in biotechnology, in particular Marker Assisted Selection, which allows indirect selection of particular traits have yet to be applied to major subsistence crops, although it has begun to produce some significant results such as the development of a pearl millet hybrid with resistance to downy mildew disease. Knowledge of DNA markers was applied to develop a flood-tolerant rice variety used by three million farmers in India in 2012. Transgenic technologies that involve introducing genetic material from another species are the next stage, and, in reality, not the sea change that is often depicted.

The influences on food prices are both cyclical and technological. Technology has transformed crop yields partly through the development of artificial fertilisers and partly through selective breeding of which transgenic techniques are the latest manifestation. The falling cost of genetic analysis will lead to acceleration in this and related areas. Meanwhile, the cyclical influences on food prices, in particular the fall in energy prices, are likely to lower global wholesale prices.

How that affects the shopping basket of the western consumer is another question. That shopping basket is a complex amalgam of promotional costs, wages, rents, taxes and transport costs as well as a small component of global raw food prices. In the short term, the effect of a concerted retail price war, or not, will readily overwhelm the underlying trends.