Marcus Cake

Yaleglobal recently published a concise article on the status of the world’s food production and consumption. It is a very similar situation to “Peak Oil” that I discussed here. In both the food an oil industries, the law of diminishing returns has resulted in a peak in food production, consumption grows strongly with population growth and ultimately exceeds supply. In both markets, market forces are distorted and do not operate efficiently to promote longer term changes that increase supply, reduce demand, encourage greater efficiency and improve resource allocation on the demand and supply side.

I have extracted a few paragraphs from the Yaleglobal for your convenience below:

The miracle that has fed us for a whole generation now was the Green Revolution: higher-yielding crops that enabled us to almost triple world food production between 1950 and 1990 while increasing the area of farmland by no more than 10 per cent.

The global population more than doubled [since 1950], so we are now living on less than half the land per person than our grandparents needed. But that was a one-time miracle, and it is over. Since the beginning of the 1990s, crop yields have essentially stopped rising.

The world’s food stocks have shrunk by half since 1999, from a reserve big enough to feed the entire world for 116 days then to a predicted low of only 57 days by the end of this year.

We are still living off the proceeds of the Green Revolution, but that hit diminishing returns 20 years ago. Now we live in a finely balanced situation where world food supply just about meets demand, with no reserve to cover further population growth. But the population will grow anyway, and the world’s existing grain supply for human consumption is being eroded by three different factors: meat, heat and biofuels.

MEAT: As incomes rise, so does the consumption of meat, and feeding animals for meat is a very inefficient way of using grain. It takes between 11 and 17 calories of food (almost all grain) to produce one calorie of beef, pork or chicken, and the world’s production of meat has increased fivefold since 1950.

HEAT: To add to worries, beyond a certain point, hotter temperatures directly reduce grain yields. Current estimates suggest that the yield of the main grain crops drops 10 per cent, on average, for every one degree Celsius that the mean temperature exceeds the optimum for that crop during the growing season.

BIOFUELS: In effect, food is being turned into fuel - and the amount of ethanol needed to fill a big four-wheel-drive SUV just once uses enough grain to feed one person for an entire year.

A “rational economist” would expect the market to undertake an investment opportunity in this situation, but the market does not behave how a rational economist would expect. This may be a result of distortions introduced by government, short term investment horizons or greater investment returns available in other industries. The market generally waits for the certaintly of higher prices before undertaking investment. Even with higher prices, greater investment in an industry is far from certain. The oil industry has had record prices over the last few years. Greater investment in supply would be expected. Instead, the oil industry has not invested and distributed record profits to shareholders. In three previous periods of oil price rises, the oil companies made significant investments in new supply. When the new supply came online seven years later, oil prices had fallen to previous levels, significantly reducing their expected returns.

In the oil industry, it takes a minimum of seven years for an investment to result in production of oil. I wonder how long an investment in the food industry results in greater production of food. If the delay is similar too oil, it may be easier and more certain for countries needing food to invest in the military, rather than food industry.

In oil and food, there seem to be impediments to encouraging the development of alternatives, encouraging greater efficiency, optimising allocation amongst competing needs and removing market distortions. The WTO has endeavoured to remove subsidies for food production. For whatever reason, they have not succeeded and world prices are less than the market price, which may result in under investment in food production. These are considered complex issues. I think the issues are simple. Demand is outstripping supply of food and oil. The issue must be addressed immediately. How do we encourage consumers to consume less, allocate increasingly scarce resources to higher priority uses, and encourage investment in supply.