FARE-talk is to provide an enduring conversation about contemporary topics relevant to food, agricultural, and resource economics.
Food Prices - July 4th, 2011
Brady Deaton: Today my guest is Dr. Patrick Westhoff, and we will be discussing his book, The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices. This book was published in 2010 by the FT Press. Dr. Westhoff is the Director of the Food Policy Research Institute at the University of Missouri in Colombia. He's had an active role in both academia, as well as in the legislative setting in the United States.
Welcome, Pat
Patrick W.: Hi. Thanks for the opportunity.
Brady: Pat, tell me a little bit about what inspired you to write this book.
Patrick W.: Well, during the summer of 2008, food prices were very much in the news. I was getting lots of calls from reporters around the country and around the world, trying to explain what was actually going on in those food markets. An editor gave me a call and asked if I wanted to try put those thoughts into a book, and I thought it might be a good opportunity, so I took advantage of it.
Brady: Now, your book focuses on the economics of food, but it orbits around the change in food prices between 2005 and 2009. Give me a little bit of background about food prices over the last little bit.
Patrick W.: Well, we've seen food prices increase in US over the last several decades at an average rate of about two and a half percent per year. For most of the last a couple of decades, food prices really weren't that much in the news. It was a relatively stable set of things going on in those food markets, and meant that food price inflation was very similar to overall inflation in the economy.
But then came 2007 and 2008. We had big run ups in the prices for a large number of American cultural commodities, and a sharp increase in the overall consumer food price index in the US, and concerns about food prices around the world. It definitely got lots of folks' attention and then just in time for everybody to get excited about the really high price of food in 2007 and 2008, we had the global recession that made things go the opposite direction a year later.
Brady: Talk to me a little bit about it. When we talk about food prices, where that information comes from, where the data on food prices and commodity prices how do ...? We talk a bit about this in your book but where is this information coming from?
Patrick W.: Well, in the US the Bureau of Labor Statistics estimates consumer food price inflation by a variety of categories every month. We can find out what the average price of food was this month versus last month or versus a year ago. Every few weeks we get new information about that.
[inaudible 00:02:28] can be more of a challenge to get information about consumer food prices in particular countries but individual countries do have their own statistical services putting out this information.
In contract commodity markets are probably easier to follow. We have lot of information about futures markets for grains, oil, seeds, meat, sugar and a variety of other agricultural products where it's very easy to get information on a daily basis about what people think is going to happen to the price of those commodities.
Brady: I want to talk a little bit about why we are concerned, or the general public is concerned about these changes in food prices. I want to just back off a bit and talk about, economists usually look at changes in prices as really important to coordinating the market system. If prices go up then it may induce incentives to plant more corn if for example the corn price increases or, if price would go up we may conserve on food, or it may induce investments and importantly it will allow for local decision making. If a farmer wakes up, and he's learned that the price of soybeans is gone up then he may plant more soybeans. We are concerned about food prices. What are those concerns?
Patrick W.: You're absolutely right that the prices play a vital role in the agricultural economy, and the economy as a whole and helping folks decide what's the appropriate set of things to try to produce and what are the appropriate set of things to consume in any given point in time. Concerns of course come from the fact that food is such a vital part of people's standard of living. Consumers in some countries spend a very high proportion of their income in food each month. In some of the poor countries lower income folks can spend half or more of their income on food at any given time.
When there is a big change in the price of food it can very directly affect their standard of living. A higher price for food can make it much harder for a low income family to be able to meet their basic needs. Of course, you have [inaudible 00:04:26] food is also a very big source of income for lots of people around the world. Higher income countries in Europe and North American and elsewhere the number of people directly involved in agriculture is relatively small and so the number of people directly affected by food prices in terms of their income is relatively modest.
When you're talking about a lower income countries, developing countries around the world, quite often a very significant portion, some places as much more than half of overall population may be involved directly in agricultural production. The price of food can be important for them in terms of their incomes as well.
Brady: How does your work experience in Guatemala inform your understanding of that issue?
Patrick W.: Yes, I was a Peace Corp Volunteer in Guatemala a long time ago. It was very good to get the exposure to people who have much more limited means and a very different set of things that drive their daily decision making.
The typical person I was working with may have only owned or operated a couple of acres, one hectare of land, which might just barely be enough to feed their own family, maybe not even enough to feed their own family. They would use the land that they operated to provide some of their basic needs for corn and for beans and then would have to rely on outside employment for whatever income they were going to have to be able to buy other necessities in life. For those people a change in the weather, a change in market prices could have a big impact on their standard of living.
Brady: Now, when you've talked about the change of food prices, you've directed your attention to a number of specific issues that you thought were important. I don't know that we'll have time to review all of them today, but I thought I would name them, and we can begin to discuss some of them.
You mention of course biofuel production, energy prices, government policies, the weather, economic growth and changing diets and there is a focus a bit on India and China here, speculation and the changes in the value of the US Dollar.
Of that list, is there any one of those or a couple of those that are more important?
Patrick W.: Oh I think over the long haul what's happening to the global economy is probably as important as anything else in determining where we're going to see food prices evolve to over the next several years and over the next several decades.
Yet, the global economy is growing at a rapid pace. We're going to see more rapid increases in demand for meats and other socio products that people tend to consume when they have higher incomes. That's especially important in countries like India and China where we're seeing diets change very rapidly in recent years.
If Chinese consumers for example are going to be consuming more meat and other high valued products in the future, that means that we're going to need to have more grain to feed those animals and that's going to have an effect on the global system.
Likewise, global economic growth will affect the price of petroleum and other major energy inputs. As the price of petroleum changes it affects not only the cost of producing crops and livestock products that will be turned into food that people eat but it will also affect the demand of bio fuels and their demand for biofuels of course has risen very sharply in recent years, caused by a variety of factors, [inaudible 00:07:39] policy and the overall economy.
Again, if I had to pick one thing that's really important for the longer haul in terms of determining food prices I'd probably say it's the general economy.
Brady: What about for the short run, the period between 2005 and 2009 that you focus on?
Patrick W.: Right. If you had to pick one thing that was really important during that period of time and continues to be important today, I'd say it's probably the weather. People who are involved in agriculture know this but, some folks who may not deal with agriculture production every day don't really understand to what extent agricultural producers are at the mercy of the weather.
If we have a favorable set of figure conditions, we can have very large crops, larger than expected. Those large crops can have a major effect in driving down food prices in any given year. Supplies exceed the immediate need to consume that grain or those other products. On the other hand if we have a short crop caused by floods, drought, disease, or whatever we can have a very sharp increase in food prices as available supplies may come short of what desired levels demand might be.
In 2006 and 2007, we saw crops that weren't quite as big as they'd been in 2004 in particular. That caused a draw down in the overall level of grain and other foods that were in storage to eventually we got to where the level of grains available for consumption were getting really, really tight relative to what demands were going to be. People got concerned about that and helped drive up the prices very sharply.
Then, in contrast we got the 2008 and 2009. We had much bigger crops than we'd had the previous couple of years. That helped to restore global supplies of those commodities and aid prices fall back again.
Brady: One of the interesting points that you bring up when you're discussing the weather is this idea that if you're more dependent in terms of trade in the global economy then you're more vulnerable to these shocks, international changes in weather. But, that if you're less dependent for example on trade, then you basically increase your vulnerability on domestic changes in the weather.
I thought that was important when you were comparing the effect that a drought in Australia might have on consumers in Australia as in contrast with low income wheat importing countries. Could you just expand on that point a little bit?
Patrick W.: No. That's right. If you're talking about what happens when you have a drought in a country like Australia, it's not really going to affect food consumption in Australia very much. The Australian markets are pretty open markets. If they have a reduced production of wheat in Australia, they'll still feed their domestic consumers and you won't see a big effect on the consumption of calories in Australia.
But the reduced exports out of Australia will mean higher prices for food in global markets and that will mean increased cost to consumers around the world that are reliant on imported wheat and other imported grains to try to satisfy their dietary needs. That's an example of where, what happens on the other side of the globe can affect people everywhere on the planet, at least everywhere in the planet where their local policies allow prices in the local market to be tied to prices in international markets.
In contrast, if you talk about say, a country in Central Africa that, because of high transportation cost or because of government policies may find it difficult to import or export, much of its local demand or supply for food. In those types of countries if there is a change in Australia or Canada or the United States, it has almost no impact whatsoever on the local markets but in contrast a change in the local weather can have a huge impact on the welfare of people in those countries so that's a case where not being able to trade means that you're protecting yourself if you will from some of the volatility in global markets but at the expense of being much more at the mercy of what happens in your local markets.
If there is a drought or something in some country in Central Africa it will directly affect the ability of people in that country to be able to get a good diet.
Brady: It's interesting that your primary two issues that you focused in on are the growth in demand in China and India and then changes in the weather. The one is the demand push, and the other is the variation in supply as a result of changes in the weather. Certainly two issues that we certainly have paid a lot of attention to recently are biofuel production and speculation.
Let's take a moment and talk about one of the first rules of thumb that you have in your book and that is that an increase in production raises the price of food. What did you mean by that rule of thumb?
Patrick W.: Well, we saw a large increase in biofuel production in the United States and many other countries between 2005 and 2007. Lot of people looking at what was occurring in the markets were very concerned that we were taking grain, sugar and vegetable oil that could be used to feed people and instead using it to produce biofuels. There were many folks who were drawing the connection saying, "Well this sharp increase in biofuel production was a major, even the major cause for the higher food prices you were experiencing during that period of time."
In the book I try to take a look at that. It's certainly true that is, if you are taking more of the world's available supplies in grains and oil seeds and sugar to make biofuels it does mean there's less available for other uses. That will obviously result in higher prices. That is indeed a large part of the story.
But, it was, I try to make clear in the book, there was also many other things that were happening at the same period of time. It wasn't just biofuels that caused the sharp run up we saw in prices there was also concerns about the weather, exchange rates and many other factors all happening at that same time.
Brady: Right. Now we talk about this first generation of biofuels regards to at least in the US, I guess we're largely talking about corn. Talk to me a little bit and one of the things I thought was really well done in your book is that you really talk about how a change in the price of corn works its way through all of the commodities and eventually into the prices of meats and such. Talk to me a little bit about that.
Patrick W.: Sure. Corn is the single largest crop produced in the United States. In fact there is more corn produced in the world than there is any other single commodity, agricultural commodity. Corn is really important just in terms of the amount being produced. It's also important because of its effect on all the other major foods as well.
When, the price of corn goes up it means that farmers are probably going to want to plant more corn [inaudible 00:14:05]. They're going to plant more corn, they're going to plant less of something else, less soybeans, less wheat, less of any other crops that might be competing with corn for available resources.
Likewise, if you are someone who's using corn, higher prices of corn maybe [inaudible 00:14:19] make you want to try to find other alternatives that you might be able to turn to instead. For example, you might want to feed more wheat to your livestock if wheat is affordably priced. You may want to use more rice in providing food for humans if you have a higher price for corn. Those things mean that you'll see substitution away from corn towards other commodities to try to assess by the demand that's out there for feed and food around the world.
When that happens that ends up driving up the price for all those competing food stuffs as well. Higher price for corn doesn't just mean a higher price for products that are made directly from corn, it also means higher prices for everything from vegetable oil to bread to rice that you might see in people's diets.
On the livestock side of the picture, corn is the number one feed that's being used to produce pork and chicken around the world. When those hogs and those chickens are going to be needing to have a feed that's more expensive that means their producers are either going to cut back on their production or going to be expecting to get a higher price of their beef and pork and chicken that they're going to be selling eventually.
By the time these pieces work through the system we end up with higher prices not just for corn but for all the grains, for all the oil seeds and for the meats and other products as well.
Brady: The simple, the rule of thumb is that increasing the biofuel production raises the price of food and an increase in the price of corn works its way through all of these other commodities and eventually into the prices of all sorts of food.
You also mentioned several arguments that complicate our understanding of the biofuel effect. You mentioned some of those. Are there any other issues we should think about when we're thinking, okay well, generally we think an increase in biofuel production will raise the price of food but what complicates that simple rule of thumb or what are the things you would be thinking about?
Patrick W.: One thing to remember if you're talking about corn based ethanol for example is that when we produce ethanol from corn we also get the distillers grains, a co-product of ethanol production that can be used as a livestock feed. Roughly one third of the weight that goes into an ethanol plant of corn comes back out the other way in this distillers grains that can be fed to livestock. That all by itself mitigates some of the effects that you might see from increased production of ethanol.
Still, we are taking a lot of the calories that are in a bushel of corn and converting them to biofuels and that does have an effect on the market. Of course as I've already alluded to, the fact that when we have higher prices for corn we're going to see more corn production, means that markets do respond. It's not as if every bushel of corn that goes in an ethanol plant reduces the amount of grain available to feed the world's people by exactly the same bushel. We're going to see some offsets on supply, some offsets in demand that will mitigate those effects to at least some extent.
Then, clearly there is many [inaudible 00:17:19] that are happening in the market at the same time. People were very quick to point to ethanol as being the major culprit in the increase in food prices. One report for example from the Royal Bank suggested as much as 70% of the increase in food prices was due to ethanol and some others [inaudible 00:17:35] on those regards. In contrast, USDA Secretary of Agriculture at the time, he thought that the impact is much, much smaller. In fact, he was citing reports and estimates that it may be less than 5% of the increase in food prices as being due to ethanol production growth.
In our own look at these questions, we've come to the conclusion that, yes there were lots of things going on in those markets at the time. Therefore some of the higher estimates of how important ethanol was in the overall mix of things was probably overstated but at the same time it was still a very significant effect.
I think when you're trying to make sense out of all this, it is important to remember that the growth in ethanol production was by no means unexpected. We knew that we were going to have a lot of new plants coming on stream in 2006, 2007. The markets had that information already. The fact that prices went as high as it did in 2007 and 2008 probably means that there had to be other factors going on besides just the growth in ethanol production.
Brady: Talk to me a little bit about the policies in the US with respect to, that support ethanol production and I guess this at least in the period that we're discussing, these policies, the importance of them depend on the price of oil. Maybe we'll discuss and blend these two topics in the price of energy and the policy issues that you've discussed in your book.
Patrick W.: Sure we have several reason why people want to produce biofuels. The simple of course is it's profitable. If people can sell ethanol or biodiesel at a price that exceeds their cost of production there's going to be an incentive for folks to expand production of those biofuels.
During the period from 2005 to 2007 and December 2008, we had several things all pushing in the same direction when it came to biofuels. We had policies in the US that were requiring increased levels of biofuel usage. We have something called the Renewable Fuel Standard that each year is mandating an increased level of biofuel use. That provided some security to those who were trying to build new biofuel plants. They knew they were going to have at least market for their product no matter what.
Also, during that period of time, we saw rising oil prices. Those rising oil prices meant that people were willing to pay more for ethanol because gasoline prices were also going up. Ethanol became an affordable alternative or complement if you will to gasoline in helping meet people's demands for fuel. Those two things combined really pushed us up in terms of the overall level of demand and supply of ethanol in the market.
It was probably surprising just how fast it was possible to increase ethanol production during that period of time. We literally doubled production in just a couple of years’ time. It is a really amazing thing in retrospect that was possible. We went from ethanol being a relatively minor use of corn, less corn being used for ethanol production than we exported each year in the united states to just a couple of years later where ethanol use of corn was roughly double that amount that was used for exporting to two third countries. Again really remarkable developments in that respect.
Again, it’s both the policies and the developments in oil market that mattered here. On top the mandates required use, we also have subsidies for the use of ethanol in fuels so that every gallon of ethanol that's blended with gasoline received a subsidy, 45 US cents per gallon. That also of course provided incentive for an increased level of production and consumption.
Brady: Now, the group that you direct, The Food and Agricultural Policy Research Institute, FAPRI at the University of Missouri did a study on the effect of these policies on corn prices. What were your findings from that?
Patrick W.: Well, two things are probably very important from that study/ First of all it is certainly true that the combination of policies we have in the United States does provide a strong incentive for additional ethanol production with implications for global markets for not just corn but all other foods across the board.
If you were to take away the existing US policies we would result in less production of ethanol and other biofuels and lower prices for grains, lower prices for oil seeds, lower prices for food.
But, the other interesting finding is that while the current set of policies were critical in building up the industry, the industry now exists and taking away those subsidies wouldn't result in the complete closure of all the ethanol plants we have out there. We would see a reduction in production by roughly two-thirds of current production would remain in place even without the current set of subsidies.
While we again see a less demand for corn, less demand for soybean oil, less demand for other feedstock in biofuel production, it wouldn't completely eliminate those industries overnight. We would continue to have a significant share of the US production of grain and oil seeds continuing to be used for biofuel production.
Brady: When we talk about oil prices, it seems to me that one of the things that, I mean, it's always had its increase, it's effect on production, so it's always had this supply side effect on the price of food and commodities. What it seems to be now is, now it has a strong demand side effect too so that the price of oil goes up and then ethanol demand and that plays itself out through the price of corn. There's a demand side effect as well as maybe the conventional supply side effect that we think about increase in oil having on the price of food and commodity prices.
You talk about crop, the role of oil in a production and you do one very interesting aspect of your book is really to break down the production of a farm and look at the role of energy prices. I was wondering if you could talk a little bit about that?
Patrick W.: Sure. Oil prices are obviously important in the production of agricultural products the world. In the United States a direct way that it comes in is of course in terms of fuel. When the price of oil goes up, it means higher prices for gasoline and the diesel fuel that's used to operate the country's tractors and combines and all the other farm equipment that people have. That's a pretty easy to understand effect on farmers' bottom lines.
In terms of fertilizer most nitrogen fertilizer in the United States is produced from a process that uses natural gas as its basic feed stock. When natural gas prices increase that means higher prices for nitrogen fertilizer, which also has effect of reducing the profits for farmers when they are trying to produce a crop.
Now, natural gas prices and gasoline prices do not always work in tandem as we've seen especially in the last couple of years. We've seen natural gas prices actually being fairly modest the last two years at the same time gasoline prices have recovered from their recession time lows. During much of the period from 2005 to 2009, we did see more of a correlation between oil and natural gas prices. We were seeing things that were pushing up cost of production of farmers in 2005-06 and the first part of 2008 and then a sharp drop in those prices in the last part of the period. Those are things that have been around for a long time and those are not new effects. Those effects have been there forever.
When those costs of production go up, it does mean farmers are inclined not to produce as much. Their profits go down and [inaudible 00:25:08] that might not be used for crop production anymore and maybe not quite as many input supply as well. That can reduce yields [inaudible 00:25:15] a little bit. These things do have the effect of helping to push up prices at least a small amount.
As you said, the new thing in the marketplace is a connection with biofuels. As higher oil prices increased the demand for biofuels, that means that a higher oil prices now [inaudible 00:25:32] not just with the reduction and supply of food but also with an increase in demand for corn, for soybean oil and other feedstock used in biofuel production. That means now that we're having a two pronged effect on the prices of food. In fact this later effect may be large on food prices than the effect just coming from the cost of production alone.
Now of course if you're a livestock producer there's not a lot of positive here. For crop producer the higher demand for biofuels and the higher resulting prices can offset some or all of the increase in production cost, that they're facing. For livestock producer it's kind of a double whammy. They're facing the higher cost to producing hogs, chickens, cattle etc. At the same time they're paying higher prices for feed as well. Their income is definitely reduced and that results over time in reduced levels of meat production, reduced level of dairy production and therefore higher prices at the consumer level for those products as well.
Brady: Well, let's move to one of the issues that I find in some ways most difficult to understand and in some ways maybe that's why it gets as much press as it does but, talk to me about the speculative argument, basically that index funds and increased role of index funds has kind of pushed up food prices. Maybe even break that argument down for me into a basic level. What's the argument that's basically being made here?
Patrick W.: Well, one of the arguments is that we have a lot of new money, if you will, involved in the commodity markets. They're index funds or other sources of revenue that are finding their way into the commodity markets. The index funds are particularly known as being long side only speculative, that is say that they're putting all their money on the side of things that'll attract prices higher if they go higher and they will make money if F&D prices do move up over time.
Some people have contended that all that additional investment on that side of the market has had the effect of pushing up prices as well. If you have more people trying to buy or betting on higher prices, it's going to have the effect of pushing those prices up as there's new source of demand if you will that's coming into just one side of the market.
Now, whether that's actually the case of not is been very controversial. While it's certainly true in any given day of the week, what people decide to do in those futures markets will determine the price of corn or wheat and of other commodities on that given day, it's a different question whether they can really effect the price of commodities a lot over a longer stretch of time. Part of the reason for that is what has to happen in terms of the fundamentals for that to be sustained.
Let's suppose that speculators in the market are somehow able to push the price of corn higher than the otherwise fundamentals would suggest it should be. If that occurs and is persist for some period of time, the higher price for corn is going to result in more corn production, it's going to result in less demand, less consumption of corn in the US and around the world and the net effect is going to be that there's going to be more corn that has to be stored by somebody. Somebody has to be willing to store the corn that's not being consumed and that is being produced that wouldn't have been there otherwise.
While that can work for a while but eventually someone's going to say, "No, wait a second. Why am I holding to all this commodity that nobody seems to want." It ends up being a natural check on things that if these stocks build to too high of a level, eventually there'll be a correction and eventually we'll see markets come back into line.
While again, I'm not denying the possibility that speculation can indeed play a role in day to day movements in market prices, I think it's much harder for speculative behavior to have a large impact on prices in the longer run.
Brady: Yeah, certainly that's consistent, I think with a recent article that came out in Applied Economics Perspectives and Policy by Scott Irwin and Dwight Sanders. They review all that literature and suggest there's no smoking gun in the sense that there's no clear evidence of an effect.
I guess, I imagine it's going to remain a subject of debate for some time in our field.
Patrick W.: Yes. I guess it's very safe to say because again there's many things that are very difficult to entangle here. There's, no single indicator's going to tell you what the price should be on any given day of the week.
Brady: Well, since, you finished the book in 2010 and you focused on the 2005 to 2009 time period, has anything recently happened that's changed your perspective or do you think basically you hit the main themes in the book?
Patrick W.: Sure, I think for the most part I'm reasonably happy that the themes laid out in the book are probably still holding in more recent market developments. I feel like, what's occurred to commodity markets in 2010 and 2011 you can see a lot of the factors at play that are discussed in the book.
Why have prices increased so much over the last year for example for grains? A large part of the story in 2010 and 2011 is a short crop of grain around the world in 2010. We saw reduced production of wheat in Ukraine, in Russian, and in a number of other countries that resulted in less wheat being available in global markets in the December of 2010 than people had been expecting causing a very sharp run up in those grain prices at that time.
In the US on the other hand we were expecting to get a record crop of corn as recently as May of 2010. The estimates coming out of the USDA for the largest corn crop ever and people were expecting this to put down prices. Indeed, prices were much, much lower than they'd been at the peak of commodity markets in 2007 and 2008. Then, just a few months later, we were learning that while that corn, 2010 corn crop in the US wasn't nearly as big as we thought it was going to be. A fairly significant downward vision in the estimates of the size of that crop corresponded with a big run up in the prices of corn in the global markets.
Since the fall of 2010, there's been lots of other factors at play besides just the weather. We've seen significant movements in oil prices both up and down. That's had an effect on the demand for biofuels, that's had a spillover effect on commodity markets as well. We've seen major changes in exchange rates, something we haven't talked about so far.
As the value of the US Dollar goes up or goes down, that effect how much foreign producers or consumers are getting for a penny for the products that they're producing and consuming in their domestic currencies. That can have a major impact on markets as well.
I think we've seen a lot of the factors at play that were discussed in the book continuing to be important today.
Brady: Let's touch again on that currency point because I think it's an important point. If the US Dollar goes down, then essentially it makes it cheaper for other places to buy food, is that the argument?
Patrick W.: That's right. If the Dollar gets weaker against other curries, let's say against the Japanese Yen, take a very simple example. That means that when buyers in Japan are purchasing US corn or some other US product it takes fewer yen to buy that product. It becomes more affordable for domestic consumers in Japan to buy that product.
If you're talking about say Brazil, as a major competitor in global markets, when the price of soybeans is what it happens to be on any given day of the week but the value of the Dollar changes, if the Dollar gets weaker against the Brazilian currency that has the effect of making products in Brazil not be able to sell for the same price they were previously. That means that you're also going to have fewer supplies coming out of Brazil in the future. That'll also have the effect of helping it drive up prices measured in dollars.
Brady: When you end your ... One of the last sections in your book you talk about looking into the future and why you're cautious to say that you don't have a crystal ball. You talk about some work that you do. You do a lot of simulations of what the future might look like. You talk about three different visions of the future. Talk to me about those three visions.
Patrick W.: Sure. A lot of what we've been talking about so far has been focused on the relatively short run, what determines the price of food this year and next year. If you want to talk about what the price of food is going to be 10 years, 20 years, 50 years from now, it's probably also very, very important to look at some longer term factors that affect food prices. In addition to the things we've already talk about two of those are technology and population growth.
The rate of growth in the world's population has been slowing in recent years. The world's population is continuing to grow. We're expected to pass nine billion people by the year 2050, which indeed is a major challenge from the global food system. Where are we going to get the food to feed an additional two billion people, especially if those population growth is going to go along with the increasing incomes as well and therefore changes in diets. That is indeed a very major challenge in front of us.
But, as I point out, the rate of population growth is indeed slowing. If we've been able to have a global system that can meet the demands of people over the last 20 or 30 years when population was growing more rapidly, at least that aspect of things shouldn't be quite as challenging in front of us as it has been. The population growth again is very, very critical and what the income of that population is as well.
In terms of technology, that's the other side of the ledger. How fast are we able to increase the amount of corn, the amount of wheat, the amount of rice that we obtain from a single hectare or acre of land around the world? World growth in yields has been fairly steady over the last 30 years, at least by some measures. The amount of additional grain that we're going to be able to produce in a given hectare of land has grown steadily over time. As a result we've been able to produce a lot more grain, a lot more food in general without increasing the amount of land used for crop production nearly as much.
If we can continue to grow crop yields at the kind of pace we have over the last 30 years then satisfying the demand for food in the future will not be nearly as challenging as it would be if that rate of growth in technology were to slow. People are very concerned about whether we're investing enough in agricultural research both in terms of public sector and the private sector to be able to get those kind of growth in yields in the future and of course whether our resource base is such that it will allow that as well.
People are concerned very much about the availability and quality of water around the world, soil erosion and of course climate change. It seems there could be threats to the future supply of food around the world.
Again, the major demand side factor being population growth and the income growth that will affect the food demand and the supply side, how fast are we able to grow crop yields over the next several decades to meet that demand.
Brady: If you had to project do you think we'll see increased volatility in food prices or will we be able to tackle this? Do you have a sense or a guess of which way it might go?
Patrick W.: We've definitely seen a huge increase in volatility by some measures in recent years. I frankly expect that we're going to see continued volatility at least for a few more years to come here. As long as our stocks of grain that we carry over from one year to the next year remain very small, any small effect of supply or demand on those stock levels will have a big effect and prices. Until we have a more stable situation that allows us to rebuild some of those stocks we're probably going to continue to have markets that are very sensitive to even the smallest perturbation.
I do think the linkage between food markets and petroleum and other energy markets is going to continue to be very strong in the future. That means unless we figure out a way to make energy price much more stable than they've been, we're probably going to continue to have very unstable food prices as well.
Brady: Now do you see any policies out there, are you an advocate of any particular policies that you think we should be pursuing both in Canada and the United States?
Patrick W.: Well, as part of my job with the Food and Agricultural Policy Research Institute, we do look at policies on a daily basis for US congress and other decision makers. We try to avoid making policy recommendations, but I can probably make some observations about what things do if were to have certain effects and what things don't.
In the past there's been a lot of controversy about policies in developed countries in general and the US in particular about what affects it might be having on global markets. Until about 2007, probably the thing you were hearing most commonly in international forum were concerns that US farm programs were having the effect of subsidizing US production of grain and other crops and therefore depressing prices for food in global markets with detrimental effects on producers around the world. Many people were concerned about those policies and wanted to see changes in those policies so as to not have those effects on farmers in other countries.
Then I think things kind of did a 180 in 2007 and 2008 as food prices increased very sharply, people started focusing instead on biofuel policy as being a major cause of the increase in prices that we were observing in that period of time pointing out the effect of those higher food prices on consumers around the world and suggesting that US needed to change those policies to avoid having those effects on food prices.
Somewhat ironically it went from a situation where people were complaining about US policies as causing food prices to be too low to just a couple of years later people complaining about US policies as being a major cause of prices being too high.
In the book I try to point out that US policies do indeed have both of those effects on world markets as do policies in many other countries around the world. I think a lot of it comes down to what do we really want to try to achieve with our policies in the future. Are we trying to primarily make food as affordable as humanly possible for everybody around the world. If that's the case, subsidizing production can actually be a good thing and trying to do things that would reduce the amount of demand for biofuels and other things that divert grains and other products to making fuel, would also be a desirable change in policy, if that's your major objective in life.
If on the other hand you're more concerned or as concerned about the welfare of farmers around the world, even in developing countries it may well be the case that you want to see opposite set of policies. You actually want to talk about trying to reduce the kind of subsidies that we have for crop production in Europe and North America and actually, thinking that biofuel policies that tend to increase [inaudible 00:40:24] might actually be on balance a good thing.
Again, it very much depends on who we're talking about and what sort of goals one has for the global food system.
Brady: Well, that's, I think, a good point to end it on with. Two visions of the future really, one in which policy is oriented towards reducing the price of food to benefit people in lower income countries around the world and the other in which it's worried about farm producers in developing countries and that they are beneficiaries potentially of a higher food price.
Patrick I want to thank you for coming and joining us and discussing your book, The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices put out by FT press. Thanks very much.
Patrick W.: Thanks for the opportunity.
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