HONG KONGThe world may soon pay a high price for years of low global food prices
resulting in large part from European and U.S. farm subsidies. The winners could
include China's long-exploited farmers.
We should remember that food shortages
were second only to oil prices in causing the huge global inflation of 1973 to
1975, which resulted in a collapse of financial asset prices and pushed the
global economy into deep recession. Then, as now, the surge in commodity prices
followed a period of easy money and rapidly rising financial markets.
History is threatening to repeat itself.
Despite a hoped-for small rise this year, China's grain output is still some 12
percent below its peak, and the country is experiencing another large grain
deficit. Most of India is still anxiously awaiting a belated monsoon. Unless it
comes soon, India's ability to export food will be in jeopardy. Australia, too,
has another drought.
While both India and China have huge
grain stocks, the interlinkage of poor local harvests and tight international
supplies is clear enough. The revival of inflation in China is due more to food
prices - up 30 percent over a year ago - than to oil and other minerals.
That may not seem important for rich
nations, for whom raw food prices are a tiny part of the price index. However,
in an interdependent world, and especially one in which China plays a major role
as supplier of manufactures, food prices are the beginning of an inflation
The 30 percent rise in grain prices in
China is spurring 4 to 5 percent or more consumer price inflation, which thus
requires wage increases well ahead of productivity growth. Those additional wage
costs are on top of higher prices for oil, steel, copper, plastics, etc.
Sooner or later these will be reflected
in export prices and hence in a significant portion of retail sales in the
United States. Inflation could again become embedded.
Given China's extremely competitive
position in labor-intensive manufacturing, it is unlikely to suffer significant
loss of market share by raising prices. Alternative suppliers are facing many of
the same cost pressures or have currencies that have appreciated against the
The good news is that in the short run
farmers in China and elsewhere will see their incomes rise, slightly redressing
China's immense urban-rural income gap. The longer-term opportunity is that it
will lead to investment in China to boost rural labor productivity, create
off-farm employment, and promote the pricing of China's scarcest resource -
Whatever the long term outcome, today's
reality is that real food and commodity shortages exist side-by-side with excess
global liquidity and low interest rates.
It is not a comfortable combination, and
it could well get worse if the weather compounds man's self-created problems.