The upside of high food prices


Global rise in food prices gives farmers the green light to grow

'The cure for high food prices is high food prices'
By Alex Binkley
True North Perspective

During the summer of 2008, food prices around the world shot up, hovered and then settled back down. The spike lasted long enough to ignite riots and protests in some countries and produce all kinds of finger pointing about the cause including foods being used to make fuels. In the end, it was mostly about the influence of speculators on world commodity prices.

In recent weeks, the U.N.’s Food and Agriculture Organization warned of another rise in food prices that would harm the poor around the globe. The U.S. Agriculture Department followed up by saying that American grain stocks were at a low ebb.

Back in 2008, Ted Menzies, then parliamentary secretary for finance and a former president of the Canadian Agri-Food Trade Alliance and the Western Canadian Wheat Growers, said, “The cure for high food prices is high food prices.”

In other words, if food prices are high enough that farmers can make money, they will increase production. The best way to feed the world is to let farmers in developed and developing countries be profitable because they will spend some of them that on improving their operations to be even more profitable.

For most of the 2000s and many years before, farms were a break even or money losing proposition. In North American and Europe, with considerable government supports, farmers had to cope with high costs for fuel, fertilizer and pesticides. In other countries, producer faced all that and little state support.

While he’s now minister of state for finance, Menzies is likely to offer the same advice.

And lots of knowledgeable folks agree with him.

Farmers watch the markets and they know that wheat, corn and oilseed prices are at levels that make it worth try to grow as much as possible.

Don Kenny, President of Grain Farmers of Ontario and a founder of Grain Growers of Canada, says prices have finally reached a level that surpasses the cost of planting and harvesting corn, canola, soybeans, wheat and other popular crops.

“It’s a definite green light to farmers to use all the available technologies to increase production,” he said. “Farmers can forward contract above their cost of production. For years, it was usually on the negative side.”

Last year, the weather cooperated with grain farmers in Ontario and Quebec and they had good harvests. Prairie farmers, especially in Saskatchewan and Manitoba, were swamped with rain. The harvest was four million tonnes below average and of lower quality as a result.

Meanwhile, drought slashed the Russian wheat crop and forced Moscow to halt exports. Australia’s grain crop was hit with disasterous flooding in December and January just as it was about to being harvested. Drought shrunk Argentina’s crops.

Stuart Clark, Senior Policy Advisor for the Canadian Foodgrains Bank, also sees an upside to low grain prices. “It's actually good news for small farmers in poor countries, who have often faced farm gate prices below the cost of production due to competition from subsidized imports.”

The higher prices will allow those farmers to expand their production creating employment and other benefits for rural communities, he added. However, they have to worry that grain prices will drop as quickly as they spiked in 2008 because they don’t have the financial supports available to farmers in developed countries.

The FAO says prices for commodities such as meat, dairy, cereal grains, oils and sugar increased 4% in December over the previous month. Rice prices have remained stable thanks to good harvests.

The price increase is the highest recorded by FAO, and is the sixth straight monthly rise, bringing prices close to the levels of 2008 that precipitated riots and protests in some countries.

Last week, the U.S.D.A. issued reduced grain stock forecasts that sent corn and soybean prices to their highest level in 30 months. The ratio of global stocks-to-demand would fall later this year to “levels unseen since the mid-1970s, reflecting an accelerated pace of vegetable oil” consumption for food and fuel. The domestic stocks-to-demand would drop to the lowest point in nearly half a century.

It concluded that global food prices will level off at a far higher average level. “The long era of cheap food is over.” Now let’s see what farmers can do.