Last week’s column posed the question: has the era of cheap food really ended? In response, I examined several factors, which are advocated by those who answer this question affirmatively, related to the global demand for food. In concluding that column I also listed five of the many factors on the supply side, which impacted food prices. These were: 1) rising oil prices 2) the consequential switch from carbon-based fuels to bio-fuels 3) massive subsidies paid to US and European farmers 4) the greater use of meat protein in food consumption and, 5) climate change. In today’s column I treat with the first of these factors.
However, before embarking on this exercise, it is worth observing that the recent debate in the National Assembly on this topic, as well as exchanges on television, reveal that all sides of political opinion have now come on board to the view advanced in this column for several weeks now that, it is appalling for Guyana to approach recent spikes in food prices as a ‘crisis.’ More importantly, it is an ‘opportunity’ for us, given our natural resource endowments and the potential comparative advantage this confers on our supply of several food items to Caricom markets and further afield.
Cynics might dismiss the debate and exchanges as purely cosmetic exercises, insisting 1) government’s posture is still basically defensive as shown in its continual boasting about its “relief measures”; 2) the continued absence of a clearly articulated strategic plan for agriculture. In particular a plan that positions agriculture in both our domestic needs and external markets created by opportunities in Caricom, the EPA, the USA, and even further afield.
Rising oil prices and food prices
The behaviour of crude oil prices in world markets affects input costs in all phases of modern agricultural production and distribution. From planting (and the use of fuel in farm machines), through cultivation, (where pesticides, weedicides and fertilizers are mainly derived from petroleum-derived chemicals), harvesting, storage, transportation and distribution to the final consumer, the cost of energy inputs carries immense weight in the determination of food prices. Time series data for many countries reveal a tight interlocking of food and oil prices.
The pass-through effects of high oil prices on food prices (and for that matter inflation more generally) depend mainly on 1) the intensity of oil use in the production of GDP, which is best reflected in economies like ours in the oil import bill; 2) the availability of energy substitutes; 3) conservation and efficiency of oil usage in GDP growth and 4) the ratio of direct and indirect energy costs to the costs of other agricultural inputs.
In Guyana the oil import bill at G$67 billion, equalled 40 per cent of GNP at current factor cost in 2007. This value was equivalent to 46 per cent of the value of the country’s domestic exports and one-third that of its total imports in the same year.
In Guyana, alternative energy supplies are largely confined to 1) the utilisation of bagasse in sugar production, 2) the use of firewood and charcoal as substitutes for petroleum-based energy in poor households and small manufacturing establishments like bakeries and 3) farm-animals (donkeys, mules and cows) used in the distribution of food inputs and outputs and in the processing and cultivation of some agricultural crops (for example, rice).
There are no readily available data on either conservation or trends in oil efficiency usage for Guyana. However, because oil is absolutely essential in securing food supplies and other necessary production, it is safe to assume that its demand is highly inelastic and therefore significantly unresponsive to price increases (as in other Caricom countries). In Guyana, there is also significant smuggling of oil, so that time series data, using official oil imports as a proxy for actual oil use is not reliable.
What do the data show?
What do the data show? Currently, the crude oil price on the world market has nearly reached US$150.
Eighteen months ago (December 2006) the price averaged US$61, that is, it has increased by more than two-and-a-half times over the last eighteen months. Indeed if we go back to December 2000 when the price averaged US$25.28, the recorded price increase since then is about six-fold.
A colleague of mine has computed the relation between recent oil price increases and the general price level in Jamaica for the first three months after every significant price increase. What he has discovered are coefficients of 0.015, 0.014 and 0.025 for each month respectively, for every 10 per cent rise in the oil price. His concern was to highlight the macroeconomic effects of the phenomenon in order to guide appropriate macroeconomic polices.
Causes
One vital factor we need to be clear on in determining long-run trends is what considerations lie behind the rapid rise in oil prices. The answer is very complex. It would suffice, however, if readers kept three main considerations in mind.
First, the depreciating US dollar exchange rate that I keep referring to is key, bearing in mind, oil is priced in US dollars. With a weak or weakening US dollar, investors feel more comfortable investing in energy and energy exporters raise prices to meet the rise in cost of non-US dollar priced items. Second, not only regular investors feel this way but also outright speculators.
Third, and perhaps most importantly, there is an ongoing mis-match between the market demand for oil (including speculators demand) and capacity to secure a significant increase in oil supply, both in the short-term and over the medium to long term. This has encouraged the search for alternative energy supplies particularly bio-fuels. This topic I shall consider next week.
In conclusion, readers should note that those who predict the era of cheap food has ended, rely heavily on the likely long-lasting nature of recent oil price increases to buttress their prediction.
