Global Warming And Food Prices

Submitted by Eric Matias Tavares of Sinclair & Co.,

Given that we all have to eat and that there are some concerning environmental developments out there, here’s an interesting question: has global warming led to higher or lower food prices (thus far)?

As always the answer depends on how this affects the balance between supply and demand. Assuming that demand grows steadily each year broadly in line with population (income effects aside), the major price swings should thus come from the supply side.

As we all know growing food is sensitive to variations in the climate, and since discussing future global warming scenarios usually involves some type of natural catastrophe, we speculate that most people would expect that food prices increase as the world gets warmer and vice-versa.

We decided to test this hypothesis using a very narrow set of (oversimplifying) assumptions.

First, let’s start with the measurement of global temperatures. There are several ways to go about this. Given the debate around some ground weather stations being affected by the gradually changing environment around them (such as urbanization, new industrial developments) and their limited geographical representation, we decided to use global temperature data provided by satellite measurements (for both land and sea, since we extract food from both).

This series is regularly updated by the University of Alabama in Huntsville. The graph above shows monthly readings as a deviation from (a positively sloped) trend line since November 1978. The data is fairly noisy but we can note in the first half of the series plenty of cooling observations interspersed with occasional warm spells, and the opposite occurring since the mid 1990s.

The next step is to find a proxy for food prices. We decided to use the Producer Price Index portion for processed foods and feeds in the US (not seasonally adjusted), as provided by the Bureau of Labor Statistics. This series should broadly capture the big picture price swings across all the food categories closer to the end-user in a liberalized market environment (at least compared to other countries). We used the year-on-year change in percentage terms.

Finally, we compare the evolution of the two data series. We smoothed the data using a 13-month (one year) simple moving average, and centered it to account for the (6-month) lag associated with this smoothing procedure. To account for the structural break of globalization our analysis starts in January 1990, which also means that a US price index should become more representative of general tendencies around the world.

From the outset we were not expecting to find any significant relationship given all the noise in both of the series. Moreover, in principle any temperature changes should require some time to be fully reflected in food prices in light of all the supply chain dynamics. Finally, the world experienced a multitude of changes since 1990: increased trade flows, emerging markets coming of age, evolving regulation, fluctuating exchange rates, different consumption patterns, improvements in logistics, higher production efficiencies and so forth.

Still, we did find an intriguing relationship…

Source: University of Alabama in Huntsville, BLS.

The graph above shows the smoothed food price index changes on the left scale and the smoothed satellite temperature anomalies on the right scale (inverted to facilitate the comparison).We have divided periods of warming and cooling as per the peaks and troughs of the latter, by picking the highest and lowest readings with some order of magnitude for that particular phase of the cycle. Therefore, a period of warming is defined as an increase in the smoothed anomaly series and cooling when it decreases, as per the annotations in the graph (again, the scale is inverted).

Notice the evolution of the two series. Warming phases are typically associated with disinflation and at times even deflation (negative growth) of food prices, while cooling phases tend to produce inflation. And this relationship seems to have gotten tighter in recent years, we venture to say because of greater integration of global supply chains and markets.

The latest warming phase started in mid-2011, which curiously roughly coincided with the top in the CRB Commodities Index. Since then food price inflation has been coming down, and is now in negative territory.

Why is that?

Higher levels of carbon in the atmosphere boost plant yields (more production = lower prices, all else equal), but since these have been growing steadily over decades we speculate that the intra-period variations might be attributed to better growing conditions on balance across the globe when it is warmer. And the tighter relationship between the two might be attributed to a more integrated global economy.

The one thing that is clear is that higher temperature anomalies (as per the dataset we used) haven’t produced any major food disasters. On the contrary, our analysis suggests that food availability might have increased as a result.

What does this mean for the future? Should we dismiss the dire warnings of Al Gore and other "alarmists" if the world continues to get warmer?

Perhaps not yet. The severe discontinuities they are predicting could indeed be catastrophic for food production, such as flooding of coastal areas, disruption of normal growing seasons, desertification and so forth. On the other hand, if the world becomes cooler in the coming years (as some predict due to weakening solar cycles) we could experience increased difficulties in providing for an ever expanding population.

Unfortunately the debate around climate change has become highly politicized and emotional, making accurate predictions – and adequate planning – even harder.

Therefore, if warm conditions persist enjoy the cheaper food (until you don’t). Otherwise you might want to jack up your carbon footprint, just in case it gets really cold.