Economy

The Age of Scarcity


The Age of Scarcity

Photograph by Daniel Acker/Bloomberg

(Corrects figure for change in corn production forecast in first paragraph. The incorrect figure was due to an editing error.)

This has been a brutal summer. Record drought across the Midwest has forced the U.S. Department of Agriculture to slash its forecast for 2012 corn production by 12 percent. Corn prices are already 90 percent higher than in July 2010. They’ve gone above 2007-08 levels, when soaring food prices sparked riots in more than 30 countries. On July 25 the U.S. government reported that corn prices may push the cost of meat 4 percent to 5 percent higher next year. And there’s good reason to believe that the upward trend is a taste of worse things to come—in particular, for the world’s poorest people, who spend 60 percent to 80 percent of their limited incomes on food.

This latest peak in corn prices is the fourth since 2006. For people in the developing world, rising food costs increase the risk of malnutrition, which reduces cognitive abilities and can have a lifelong impact on both health and earnings. World Bank researchers estimate that food-price changes between June and December 2010—including a 73 percent rise in corn prices—pushed 44 million people back below the $1.25-per-day extreme poverty line. If recent volatility is the start of a long-term pattern, it could significantly slow global progress against poverty over the next 50 years.

That the scourge of hot, dry weather in the American breadbasket could affect the lives of hundreds of millions in Africa and Asia shows how integrated the world’s food supply has become. It’s also a reminder of the economic costs of a warming planet. Luckily, the solutions to our global agricultural problems are known, straightforward, and affordable. And while it’s natural to be skeptical of politicians’ ability to deliver, there are some signs this time that they might be stepping up to act.

The food crisis is the product of a convergence of trends. Nine of the 10 hottest years on record for the planet have occurred since 2000. Even the chief executive officer of Exxon Mobil (XOM) accepted in June that this may have something to do with the fossil fuels his company extracts. A 2001 Intergovernmental Panel on Climate Change report estimated that over the long term, climate change could reduce agricultural yields by as much as 30 percent. Making that problem worse will be constraints on irrigation posed by water shortages. Already, a third of the world’s population lives in regions facing water shortages; by 2030 global water requirements could be as much as 40 percent higher than the currently accessible supply, according to a study by McKinsey.

Factors other than weather, of course, also play a role in food-price spikes. In both 2008 and 2011, agricultural prices rose in tandem with energy prices, just as they did in the 1970s. That’s in part because it takes 160 liters of oil to produce a metric ton of corn in the U.S., and the cost of natural gas accounts for three-quarters of the cost of nitrogen fertilizer.

Growing demand for crops—from more people, more farm animals, and more use of biofuels—has also raised pressure on prices. Between 1990 and 2010, total global per capita consumption of beef, pork, and poultry increased by 1.2 percent annually. Over the next 50 years food output will have to rise 50 percent to cater to 2 billion extra people and their growing appetite for meat. Meanwhile, growth in global biofuel production rose 30 percent per year from 2006 to 2008. The Food and Agriculture Organization of the United Nations predicts that biofuel production will double by 2018, causing an estimated 14 percent rise in grain prices.

Finally, volatility itself makes gambling on commodity futures more attractive for speculators. Commodity futures funds in 2008 invested as much as $250 billion to $300 billion. During the 2008 crisis, fear of domestic food shortages led governments to aggressively purchase on international markets and to curb exports—Russia banned wheat sales, for example—raising global prices even more.

So, what does past experience suggest about the future? More people are demanding more food; biofuels and farm animals are consuming a larger proportion of crops; climate change is lowering yields and increasing the risk of crop failure; and speculation and protectionism are amplifying the resulting shocks. Though this sounds like a recipe for widespread malnutrition and civil unrest, responses to this hydra-headed challenge aren’t elusive or all that costly. Helping markets work better could take us a long way toward greater global food security.

First, we know how to deal with climate change: Stop subsidizing pollution and put a price on CO2. In the U.S. alone, fossil-fuel tax breaks and other subsidies were twice as generous as those to renewable energy between 2002 and 2008, according to the Environmental Law Institute. Globally, subsidies for oil, gas, and coal totaled $409 billion in 2010—compared with $60 billion for renewable energy that year. Cut off the fossil subsidies and put a small tax on carbon, and you’ll make some progress toward keeping the planet cool. In 2008 economist Nicholas Stern estimated that the cost to the global economy of avoiding significant climate change was only about 2 percent of the world’s output, or less than one average year of economic growth. Given how rapidly alternative energy prices have fallen, it might be more of a bargain than that today.

With a little policy intervention, input prices can be lowered, as well. The combination of cheaper renewable power and abundant natural gas should keep down the energy costs associated with agriculture. The cost of moving to a sustainable pattern of water use through improved irrigation and better pricing is even lower. McKinsey puts it at around 0.06 percent of global gross domestic product.

In the search for yield gains to help meet growing demand, we know that we can significantly improve farm productivity, because we’ve done it before. The green revolution in India doubled wheat production between 1964 and 1970; at the height of the food spike of 2008 the price of rice was still only one-half to one-third its level 40 years earlier. Across the developing world, cereal yields increased at about twice the rate of population growth between 2000 and 2008. In the club of rich Organization for Economic Co-operation and Development countries, meanwhile, as agricultural land was shrinking by 4 percent between 1990 and 2004, food production still increased 5 percent and agricultural biodiversity improved. Soil erosion, greenhouse-gas emissions, and excessive fertilizer use all declined.

Seed industry projections suggest that, due to improved breeding and biotechnology, U.S. corn yields could double between 2005 and 2030. And there are large parts of the world that could grow significantly more food per acre through modest investments in irrigation, fertilizer, and existing crop varieties. Yields in Indonesia, for instance, doubled over the period from 1970 to 2000 largely thanks to more widespread irrigation.

In Africa, the potential is still greater. More than 70 percent of Africa’s rural population still lives at least 30 minutes’ walk from the nearest all-weather road. With improved infrastructure they would increase their access to resources like fertilizer, as well as their ability to sell their products to national and international markets and to tide themselves over with imported foods in times of shortage.

This year’s price spike probably won’t be a disaster of Biblical proportion. If global leaders don’t act, however, it’s likely to be a sign of things to come: permanent volatility in prices that are trending upward, putting at risk some of the world’s most vulnerable people. At their recent meeting in Los Cabos, Mexico, leaders of the Group of 20 nations agreed to phase out fossil fuel subsidies and focus attention on increasing agricultural productivity in developing countries. To avert recurring and increasingly damaging food crises, that talk needs to be put into action. For all the problems facing the world, this is one we know how to fix.

Kenny is a senior fellow at the Center for Global Development and author of The Upside of Down: Why the Rise of the Rest is Great for the West.

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