The New Food Crisis

Last year's letter showed that 10 years ago we entered a new era of rising resource prices after at least 100 years of steadily falling prices. It now appears that about five years ago we also entered a period of sustained food crisis for several of the poorest countries. This situation seems likely to continue for the indefinite future. If it does, it will cause the social structure of several countries to break down, resulting in waves of immigration on a scale unknown in modern times, outside of major wars. In the drive for resources, particularly food but also energy, country relationships are also likely to be destabilized, causing risks to global security. China, more concerned with future resource security than others, will find it particularly tempting to throw its increasing economic and military weight around. This risk also seems to be ignored or underestimated by national governments, although the military arms of several, including the U.S., seem to be exceptions. Not needing to be re-elected, military leaders have far longer time horizons than other branches of government and can afford to pay attention to both the long-term consequences of resource shortages - particularly food and water - as well as the growing effects of increasing temperatures and weather instability on the long-term security and well-being of their countries.

The vulnerabilities from food pressure can be easily demonstrated and are already beginning to play out beneath our noses. In developed countries, food accounts for only 10 or 12% of our total budget. For several poorer countries though, including Egypt, food costs have risen to 40% and above of their total expenditures following the surge in global grain prices since 2002. (Wheat is the critical source of calories in Egypt and the rest of North Africa and much of their wheat is imported so they are directly exposed to global price moves.) Global grain prices almost tripled in the last 10 years. If they were to double in the next 20 years it would be painful indeed even for rich countries, but simple arithmetic will show you how impossible the situation becomes for those poorer countries that start out with a 40% share of food in their budget. It is not even clear that the existing 40% share can be easily tolerated: grain prices are thought to have already played a substantial role in the Arab Spring, particularly in Egypt. Any material increases in real grain prices from here on are unlikely to be easily manageable.

David Fuller's view Jeremy Grantham wears his environmentalist hat in this issue, making some very long-term points about unsustainability. They are certainly interesting and well considered by a thoughtful individual. However, very long-term forecasts are notoriously unreliable, not least regarding sustainability.

In the last decade Fullermoney often talked about 'Supply Inelasticity Meets Rising Demand'. We were referring to the inability to increase supplies of industrial and even some agricultural commodities following years of underinvestment due to exceptionally low prices in real terms. Simultaneously, demand from so-called developing countries, some with huge populations, was surging because they had mostly embraced capitalism in its various forms and were also benefiting from globalisation.

In today's environment demand for industrial commodities has eased somewhat, in line with slower global GDP growth and supply has increased following years of investment in capacity by producers of these resources. However, demand will increase once again when global economic growth next improves and prices for most resources will more than likely rise as well. However, eventual price spikes, not least for energy, soon become a headwind for economic growth, as we have seen and discussed throughout these cycles.

One does not need to be a Cornucopian to believe that the supply of industrial resources is less finite than we have often been told by various forecasters over the decades. New discoveries continue to be made, particularly in previously under explored regions of the globe. While the demand for metals generally rises, so does recycling. The onward march of technology aids in the search for industrial resources and particularly the extraction of previously unobtainable deposits, not least for unconventional supplies of tight / shale gas and oil. Technology is also behind the development of all renewable forms of energy, which are still in their infancy. Substitutes for metals are developed, from plastics to carbon fibres and the potential for graphene in coming decades is huge. So I am less pessimistic than Jeremy Grantham on the issue of sustainability for industrial resources.

I do share his concern over climate change and the impact that it has had in some areas of agricultural production. This is currently an outlier event and hopefully remains so, although we will not know for sure until the world next experiences two or three reasonably benign years of agricultural production. Meanwhile, this year's crop damage will raise food prices somewhat next year and cause some hardship in poor countries.

I do not share Jeremy Grantham's pessimism over the ability of biochemists and agronomists to continue the century-long process of improving crop yields. These developments are never exponential and can plateau for a while but 'needs must' remains a powerful motivator. The commercial rewards for developing higher-yielding, drought and disease resistant crops remains considerable.