Volatile food prices: are they really reflecting what we pay for?

Sensemaking / Volatile food prices: are they really reflecting what we pay for?

05 Apr 2011


Even though prices are on the up, are we really paying enough for our food?

Do you know the price of a pack of sausages? Or a pint of milk? Probably not, and it's hardly surprising. In the past couple of years, the retail price of staple foods has changed more times than you've had hot dinners. The general trend, however, has been upwards.

The global food price index produced by the UN Food and Agriculture Organization reached 231 points in January 2011, the highest recorded value since the index began in 1990, and well above the previous peak of 213.5 in 2008.

If you haven't felt the difference at the check-out yet, it's because the cost of raw ingredients, like tea, coffee and cereals, takes time to filter through to the shops. In fact, supermarkets in the UK kicked off 2011 with a bargain bonanza worth £1 billion. At £2 for eight pints, milk was actually cheaper than bottled water. But costs as low as these are certainly too good to be true.

"The long-term trend is almost certain to be up, and quite seriously", warns Donald Hirsch, Head of Income Studies at Loughborough University. "If food prices were to increase at the same rate over the next decade as they have over the past four years, then a rise in the region of 75% is well within the realms of possibility."

So what's driving this trajectory? For one, the world simply has more mouths to feed. Today there is just 0.2 hectare of arable land per person in the world – down from 0.5 hectare half a century ago. There's also an increasing appetite for meat from India and China. China now imports vast quantities of soya beans – to fatten up its livestock as much as to feed its people.

"In 1995, China produced 14 million tonnes of soybeans, and consumed 14 million tonnes", says Lester Brown, President of the Earth Policy Institute. "In 2010 it again produced 14 million tonnes of soybeans; it consumed 70 million."

Fingers have also been pointed at hedge funds and banks for speculating on future food prices. For Julian Oram, Head of Policy for the World Development Movement, the price spikes of 2008 demonstrate the influence speculators had over the food market. He traces the surge in demand for agricultural futures – which saw an increase of 32% in 2007 – back to the failure of the US sub-prime mortgage market the year before. Investors were looking for "somewhere else to park their cash".

Experts are now concerned by how well speculators are playing the market. Any shortage, due to a drought for wheat, for example, or a virus in rice, can trigger interest from commodity traders and further spikes. And why wouldn't it?

"The price of wheat has risen 87% in the last 12 months, and that's a great return in anyone's books," says Dave Norris, an independent grain market specialist. He suggests this 'financialisation' of the market accounts for "the top 20%" of rises in big commodities like wheat, corn or soybeans.

But rival demands for land are also having an impact. The explosion of biofuels, driven by national policies and the rising price of oil, has seen land turned over to energy crops.

"The US grows around 340 million tonnes of corn", says Norris, "a third of which now goes into the ethanol industry to light their streets or power their cars, rather than to feed people or animals."

And the productivity of agricultural land is, as ever, at the mercy of the weather. In the UK, a dry summer in 2010 created a shortage of feed. A harsh winter followed, forcing farmers to keep livestock housed and therefore buy in more feed, again driving up the cost.

"The winter affected us badly", says Hans Porksen, who runs Gallowshill Farm in Northumberland. "We couldn't get the sheep out to graze and so they were eating us out of house and home. I normally pay £100 a tonne for hay, but I had some delivered recently and it cost me £240 a tonne."

Price tag

Phil Bicknell, Senior Economic Advisor for the National Farmers Union (NFU), says many farmers are finding it difficult to account for such hikes at the farm gate, with retailers locked into competition for low prices in-store.

So how can we strike the balance between fair prices for farmers on the one hand, and affordability on the other? Bicknell advocates "more forward-looking contracts, or even 'cost plus' contracts which would account for this kind of volatility". Some retailers are finding long-term advantages in this sort of approach. Marks and Spencer was the first UK retailer to introduce a milk payment scheme that takes into account the costs of production and links the price paid to its farmers to the shelf price. Tracking these costs, it has found, encourages increased efficiency among producers.

Governments have a part to play, too. Nicholas Sarkozy has made greater global food price stability a key focus for France's presidency of the G-20. He is pushing to establish a central clearing house that would register global agricultural transactions and impose position limits on investors, following the American model. There is also talk of international buffer stocks for grain.

Of course, the future of supply will depend on how we value its production now.

"At the moment, the true cost of a farmer's produce isn't reflected in the price people pay for their food", says Ian Price, food and farming expert at Triodos Bank. "I'm 56 years old. When I was young, my mum would buy a chicken from the butcher and we'd have three meals out of that. We'd spend 35% of our income on food. Now it's only 20%. We've driven down the cost of food, which allows people to do other things with their money. But we're not paying the true price in terms of water use, mineral depreciation, and so on."

And on this point, farmers and bankers agree. "People must be prepared to pay for their food," says Porksen. "I'm not saying it has to be as much as 40 years ago, but it has to be more expensive than it is now."

Teach a man to milk…

As food security continues to climb up the global political agenda, countries may start to harness their farmers' expertise as a very tradeable asset.

Developing economies expect their populations to grow exponentially over the next few decades. Yet for many of these countries subsistence-style agriculture is still the norm. So, technical expertise on more efficient methods of food production could soon be at a premium.

New Zealand dairy co-op Fonterra certainly thinks so. It is currently investigating a pilot farm in India to test out the effectiveness of its large-scale efficient milking parlours in one of the world's fastest growing dairy markets. China is also interested in tapping into the technical expertise of New Zealand farmers to feed its many mouths. And only last month a delegation of US and Brazilian bigwigs set out their stall for biotech and GM crops in the UK.

Could international trade see a shift away from commodities towards agricultural expertise? - Will Frazer

Milk in a supermarket

Big, white and shiny

Could the traditional image of a livestock farm with silage clamps, slurry lagoons and much spreaders be up for a whitewash?

H20 Farm's hydrophonic forage system glistens with iPhone chic. Slick, compact and cleverly designed to meet a definite need, it claims to grow sprouting forage barley from seed-to-feed in just seven days, in stacked trays of nutrient rich water.

This new product entered the fray of agricultural shows at the end of spring 2010, when the food price crisis was no more than a whisper on the wind. By the end of the summer, over 500 farmers had expressed an interest in it.

It's an unlikely technology for those used to rearing their stock on grass, but with a succession of dry springs, cold winters and more extreme weather likely as a result of climate change, farmers may find hydroponically home-grown fodder a wallet-friendly solution. - Will Frazer

This article is taken from the Green Futures Special Edition Tomorrow's food, tomorrow's farms.

Image credits: BrianAJackson / istock; calvio / istock; H20 Farm Ltd; fotofrog / istock

What might the implications of this be? What related articles have you seen?

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