Why Food Is Only Getting Pricier

While climatic shocks continue to cause spikes in food prices, recent rises could be more long term.

Russia’s decision to stop all grain exports due to extreme heat and unpredictable weather patterns will eventually hit consumers’ pocket books – it’s just a matter of time.

Climatic shocks send markets and speculators alike into flurries of activity, and threaten to launch food prices skyward. Most would agree that when a storm descends, it’s often best to wait it out until the sun returns. But make no mistake, these sudden market swings signal the start of a new era in food production. And this isn’t necessarily a bad thing.

Russia had planned to become the world’s most important wheat exporter by 2020. Along with neighbouring Kazakhstan and Ukraine, it has become a major rival of wheat-exporting nations such as the U.S., Australia, and Canada. But eastern Europe is discovering that weather can quickly put a damper on entire economic development policies.

When the supply of wheat decreases, it affects many other commodities. Wheat is not only used to make food, but also to feed livestock, meaning that a drop in wheat production can increase the demand for substitute crops such as corn. So when the price of wheat shoots up, it tends to pull the price of other commodities up along with it.

How much higher food prices will go remains unclear. Most agricultural commodities are trading higher these days – soybeans and corn prices are at their highest since December 2009, and coffee is sitting at $1.70 a pound, its highest level in over 12 years. While most food giants are not disclosing how much they intend to raise their prices, most input prices – such as wheat, pork, and coffee – will climb a combined 15 per cent by July 2011.

In the aftermath of the 2008 price increases for food commodities, the prices in the western world for products such as breads, pastries, and pasta increased by 20 per cent. But even though many would regard looming hikes in food prices as likely, the situation is not quite the same as in 2008.

Commodity prices were not the biggest factor in the increase of retail food prices back then. At the time, oil was trading at $146 a barrel, a record high. Because of population density, or rather the lack thereof, food has to be transported over longer distances, which drives up costs. So higher oil prices meant higher food prices.

The current cost of energy is nowhere near what the food industry had to cope with a few years back. So while prices will likely increase, they will do so at a much slower pace than in 2008.

Yet higher food prices may actually be coming at the right time. Because we are all consumers, we naturally think that low prices are good. But consumers do not often correlate trends in prices to trends in income.

It’s true that, as long as your income stays constant, lower inflation rates are best. The same is also true if national income stays constant. But if the national income begins to shrink, falling inflation rates would be disastrous if it becomes deflation.

Inflation in the western world is already dangerously low. The consumer price index in Canada, the main indicator for inflation, which has been hovering at around 1 per cent in recent months, is in great need of a little push upwards. In the United States, there is even some talk about deflation as the unemployment rate remains close to 10 per cent.

Another potential benefit of higher food prices is improved nutrition. Consumers are eating too much of too many nutritional evils like salt, sugar, and fast food. Affordability and convenience have been the main drivers of this for quite some time now. Incremental and reasonable hikes in the price of food may compel consumers to change consumption habits that have become ingrained over the last few decades when cheap food was king. Spending barely 10 per cent of your household budget on food – with a similarly small proportion of time spent thinking about what you eat – is slowly becoming a thing of the past.

So what is happening to agricultural commodities is hardly a crisis. Rather, it is part of a continuing recalibration between supply and demand. We are merely going through a transition period in our food production and distribution systems.

More than a billion people will join the middle class by 2030, and many of them won’t live near arable lands. This will put a strain on grain supplies and will expose food systems to significant systemic pressures. No one knows how things will evolve over time but we are definitely seeing the beginning of a new world order in food.