Rising Food Prices

It is scary to see how prices of food and fuel have been skyrocketing for the past few years. Not sure if anyone see this coming, probably Jim Rogers. However, in every asset class and every industry, you will have one 'guru' naming that asset class/industry as the next big thing. Nassim's 'Fooled By Randomness' will teach us that Jim Rogers just got lucky. Maybe you can be that lucky if you prayed at every temple during your round-the-world biking tour.

Anyway, food and commodities inflation is nothing random. I believe it is once again marked by underlying economic trends. We have seen and heard this before - booming emerging markets lead to booming demand and thus prices go up. Simple demand-supply economics. However, economics also teaches us that supernormal profits drive supply upwards and margins to fall. In the medium term, supply will react and prices should not be too volatile.

Therefore, if information flows freely, farmers will engage in production that brings them the most profits. Production of food should increase and thus bring down prices. The problem is that farmers may not have access to markets and information. They harvest their crops and sell them to distributors who will bring the crops from rural areas to the consumers. I will argue that the current inflation in food benefits these group of middlemen, not the farmers. Therefore, the failure to see significant benefits in planting more cause farmers to respond slower to the high food prices.

The immediate step for many governments is to introduce export-controls for food items. That is a short term solution that is very ineffective for the long term. A for-free-market economist will argue that the agriculture sector should be fully exposed to the possibility of supernormal profits that they can make from international trade. Export-controls will deny that. In fact, government should improve market access such as allowing farmers to know the prices traded at different regions or provinces. Government should also try to improve the productivity of farmers.

Yes, I am trying to ask for higher incomes for the farmers. I do not find the situation of high food prices worrying as strong economic growth worldwide has made millions richer and increased their spending power. However, the agriculture industry in emerging economies such as China and India have suffered far too long. This is a chance for farmers to become richer, shrug off poverty and gain fair returns for their economic activities. In the 90s, people will capital and IT-know-how became rich. In the late 90s and early 2000s, people with hard commodities became rich. Now, its time for the farmers.