Friday, December 07, 2007

The Economist: Food Prices, Cheap No More

In our series on Tectonic Shift, we have been discussing how globalization and technology are leading to a balancing of wages as:

1. competitive pressures push developed world wages down, and
2. people in the developing world are being employed more productively.

The thesis is that this should lead to an increase in demand for basic necessities which are highly valued, such as food and energy. Meanwhile, more conspicuous types of consumption might start coming under pressure.

Well this week, The Economist had a special report about Food Prices, Cheap No More : (subscription might be required?)

The Economist's food-price index is now at its highest since it began in 1845, having risen by one-third in the past year.
Yet what is most remarkable about the present bout of “agflation” is that record prices are being achieved at a time not of scarcity but of abundance. According to the International Grains Council, a trade body based in London, this year's total cereals crop will be 1.66 billion tonnes, the largest on record and 89m tonnes more than last year's harvest, another bumper crop. That the biggest grain harvest the world has ever seen is not enough to forestall scarcity prices tells you that something fundamental is affecting the world's demand for cereals.
Higher incomes in India and China have made hundreds of millions of people rich enough to afford meat and other foods. In 1985 the average Chinese consumer ate 20kg (44lb) of meat a year; now he eats more than 50kg.

So we are starting to see increased demand for food leading to "agflation". But it is also important to note that farming is a very basic and low barrier business, and it is cheap and relatively easy to add more production. So we might see prices stabilizing fairly soon.

That is not the situation with oil and paper. Oil has some scarcity and it is becoming more difficult to add production. Paper is a money-losing venture and requires a costly investment. I believe the value of these products to society and the difficulty in adding supply will eventually translate to higher profits for two of my investments, Harvest Natural Resources and SFK Pulp Fund.

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