Deja Food: Will Social Unrest Surge As Corn Prices Soar?

With Corn hitting its highs again, we are reminded that global food production has been hitting constraints as rising populations and changing diets hit against flattening productivity, water and fertility constraints, and the likely early effects of climate change. As was described in the recent all-encompassing theory of global-collapse, there is general agreement that one of the contributing factors to the rolling revolutions beginning at the end of 2010 was increasing food prices eating into already strained incomes. It is unclear how much impact easing has had on food prices this time, weather has very much made its presence felt (as we noted here). From one omnipotent force (central bankers) to another (hand of god), the fear is that more broadly, food is likely to be a more persistent problem than oil supply. This is because we require almost continual replenishment of food to stay alive and avoid severe social and behavioral stress - food is the most inelastic part of consumption. This says nothing of the pernicious inflationary impact that will likely quell the kind of free-flowing printing so many hope to see from China et al.

The FAO food price index and outbreaks of social unrest. (Lagi et. al.)

Global food production has been hitting constraints as rising populations and changing diets hit against flattening productivity, water and fertility constraints, and the likely early effects of climate change.

One of the main effects of the Green Revolution of the 1950's, 60’s and 70's was to put food production onto a fossil fuel platform. Modern food production relies on pesticides, fertilisers, machinery, drying systems, long-haul transport, packaging, freezing and so on, all fossil fuel dependent. Modern seed varieties require more water, which requires more complex irrigation and aquifer pumping, again requiring more fossil fuel input, and putting more strain on already stressed water supplies. By various estimates, between six and ten fossil fuel calories are used to produce every calorie of food.

More directly, food is now being converted into fuel, adding further pressure to already strained supplies. Today, 40% of the US corn crop is used to produce biofuels, and globally, biofuels consume 6.5% of grains and 8% of vegetable oil production. The rise and fall in oil prices has been matched by food prices.

Food is the most inelastic part of consumption. Like oil, rising prices drive out other consumption, which can lead to job losses, unemployment, and defaults. The most developed countries spend about 10% of their disposable income on food, however in many parts of the world it is over 50%.

At this point it is illustrative to look at how the interactions between the financial, oil and food economies can have major unexpected repercussions. When major stresses are transmitted along complex and increasingly vulnerable inter-dependencies, there is a greater risk of system wide contagion and instability.

While food prices remained high, they received a further stimulus and increased volatility via massive quantitative easing in the US. The two rounds of QE were to support battered financial institutions. This injection helped drive a global commodity bubble, affecting an already stressed global food market. Pressure was displaced from the US onto the plates of citizens in the Middle-East and North Africa.

There is general agreement that one of the contributing factors to the rolling revolutions beginning at the end of 2010 was increasing food prices eating into already strained incomes. Food is, and always has been a mainstay of welfare and social peace. Figure:9 shows the recent correlation between the FAO index and outbreaks of political and social unrest.

One outcome was the revolution in Libya, a result of which was the loss of nearly two million barrels of high quality oil a day to the global economy. Thus oil prices remained high, averaging well over $100 even as fears for the global economy increased and growth in many major economies began to stall. From this perspective, QE temporally displaced risk to banks that returned as higher oil and food prices, via the real economy and a distant revolution.

More broadly, food is likely to be a more persistent problem than oil supply. Firstly, this is because we require almost continual replenishment of food to stay alive and avoid severe social and behavioral stress. Secondly, the loss of food in society had a far deeper impact than oil. Finally, the implications of evolving systemic risk means food production, access and affordability would be undermined.





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