As Food Prices Become The World’s Greatest Economic Problem, There Is No Solution

The food crisis got worse yesterday just as it seems to get worse as each week passes. CostCo (COST) is having to limit fulfilling huge orders for items like flour. According to Reuters "with global tensions over food supplies mounting, prices of world staples rice and corn surged on Tuesday amid strong demand and concerns over slow planting of the new U.S. corn crop."

Not only is the problem of rising food costs increasing inflation; it is cutting away at the world’s ability to feed the poor.

At recent G-7 finance minister meetings and the IMF gathering, food prices were identified, by many measures,  as being a larger issue for the global economy than the credit crisis which is doing so much damage to financial market liquidity.

According to The Wall Street Journal "Surging commodity prices have pushed up global food prices 83% in the past three years — putting huge stress on some of the world’s poorest nations." Food inflation rates in China are nearly 20%.

Feeding the starving sits way higher on the set of priorities for food supply than inflation does, but solving the two problems is related in almost all ways, and, it defies resolution in almost every way.

There are, at least, possible solutions to the rising price of oil. OPEC may see that its actions are gutting the GDP growth of many nations and decide that its is their own best interest not to see the global financial ecosystem come apart at the seams. The US could let out some of the petrol in the strategic oil reserves. The action, by itself, might push down speculation in oil and bring crude down by several dollars.

The credit issues plaguing banks and seizing up the capital markets has the potential, at least, of being resolved over the next year by central banks pumping money into the system.

Food supply and demand has no central system for driving a resolution, no central banks or oil cartel.

Many of the world’s leaders believe the US is at fault for much of the food shortage. They reason that selling crops for biofuels is a profitable but cruel use of a commodity which is in short supply. There is some truth in the finger pointing, but it is not the whole truth.

Crop yields in large agricultural economies like the US, Canada, and Russia is at an all-time peak, Better land management, fertilizer, and seed have seen to that. But, the sad fact is that the number of the world’s poor and under-nourished grows with the global population increase and war pushes more and more people off of producing land and into huge refuge camps which grow no crops by have an unusually immediate need for food.

With food production worldwide running at levels which are unlikely to rise and the number of people who need food for survival moving up, there is no ready solution to bringing down the inflation rate of agricultural commodities.

Unless and until the central banks are willing to underwrite the cost of food by purchasing commodities and selling them below market nothing will happen. They have taken bad paper from banks in exchange for good cash. Some counties, like China, already underwrite the cost of fuel to keep their economies growing.

Bring down food prices involves buying up the fruits of the global farming system and "loaning" it to many of the world’s nations. But, who has a check-book that large?

Douglas A. McIntyre