Agflation!

Mon, 07 May 2007 09:21:06 GMT

'Agflation' is a word used to describe the phenomenon of the rising price of food. The Economist tells me that Merrill Lynch introduced the term to account for the fact that "The prices of rice, wheat, corn, barley, cattle and pork are all up by more than 30% since March 2005."

In an almost facetious take on the possibility of food scarcity and insecurity, Bedlam Asset Management created the headline: "NUNS mug disabled orphan for bag of crisps." But the reality is potentially much more serious. Food prices are rising faster than at any time since the early 1980s.

Normally, farmers would just grow more food to increase supply to meet demand. But there are conflicting requirements for crops on available land. Climate change is cited as the primary factor. Where there is no water, you can't grow more crops. Australia, which has been a cereals and meat exporter, is being hit hard by an intense drought which shows no sign of breaking.

Land once used to grow animal feed is now being used to grow corn to create ethanol in America. Corn is fetching higher prices as a result so cropping has changed from soybean to corn production. Since the price of corn is higher, so is the price of animal feed. A major American agricultural company, Tyson Foods, claimed it had suffered a 41% drop in profits on poultry in the first quarter of this year as a result. The costs are passed on to the consumer. The same goes for beef and pork.

Americans would be better off importing Brazilian sugar to make ethanol rather than paying Midwest farmers to grow corn, but tariffs on sugar imports are high.

The EU is positively encouraging farmers to remove land from cultivation.

The Economist, being a free market proponent, hints that regulation should be removed to encourage producers to respond to the simpler laws of supply and demand.

After all, bread riots have brought down governments in the past, or at the least, caused serious political tensions. Bristol in 1753. UK in 1847. Jordan in 1996. Bakers strike in Morocco against government refusal to increase bread prices, 2004. And so on.

It seems a far cry from picking up your individual salad or sandwich in a British supermarket. How much are you willing to pay for food?

The kitchen drawer: Economics

Agflation!