Rising Prices, Changing Climate

Tuesday, 22 February 2011 08:21 By Paul Krugman, Krugman & Co. | Op-Ed | name.

Rising Prices, Changing Climate
(Image: Luojie / China Daily - Beijing, China / CartoonArts International / The New York Times Syndicate)

What’s behind the recent worldwide surge in food prices? The usual commentators are making their usual media appearances and trumpeting the usual claims: It’s all about the Federal Reserve! It’s all about the speculators!

However, I’ve been looking at the federal government’s estimates of world supply and demand, and clearly what we’re experiencing is the fallout from a global harvest failure due to terrible weather. Yes, climate change might be the culprit.

According to the United States Department of Agriculture, grain production around the world is down almost 3 percent from two years ago — a substantial drop when you take the increase in world population into account. And wheat production is way down, almost 6 percent from two years ago.

Now, you might wonder why a production shortfall of, say, 5 percent might lead to a doubling of prices. Part of the answer is that some kinds of demand are growing faster than population — in particular, China is increasingly importing feed because domestic demand for meat is rising. Also, demand for grain is highly price-inelastic, which means it takes big price rises to induce people to consume less, yet collectively that’s what they must do given the shortfall in production. (In the United States, the U.S.D.A. estimates it would take a 25 percent rise in the prices of breads and cereals to induce a 1 percent fall in grain consumption.)

But why is production down?

Most of the decline in world wheat production, and about half the total decline in grain production, has taken place in the former Soviet Union — mainly Russia, Ukraine and Kazakhstan. And most people are aware that this is due to last summer’s incredible, unprecedented heat wave.

Before I continue, here’s the obligatory disclaimer: No single weather event can be definitively attributed to climate change. But if you look at the data, it sure looks like climate change is a major contributor to the surge in food prices we are seeing.

This is not happening only in Russia: extreme weather elsewhere — a marker of climate change — has played, and will likely continue to play, a role in bad harvests. Earlier this month, the United Nations’ food agency issued a warning that the winter wheat crop in China, the world’s largest wheat producer, is threatened by the worst drought in 60 years.

While China is largely self-sufficient regarding its grain supply, in recent years the nation has become an importer of soybeans, which compete with grain production for land and other resources. That’s another way Chinese growth puts pressure on world food prices.

If China has to import wheat, too, that’s seriously bad news.

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Backstory: Supply, Demand, Poverty

The World Bank released a report on Feb. 15 showing that a global spike in food prices has pushed 44 million people in developing countries into extreme poverty since last June.

The organization said that in order to curtail further poverty, “investments in raising environmentally sustainable agricultural productivity, better risk-management tools, less food intensive biofuel technologies, and climate change adaptation measures are all necessary over the medium term.”

One factor driving the rise in prices is a drought affecting China’s winter wheat crop. Shandong Province, the core of China’s wheat belt, has received only a half-inch of rain since September. The drought is so severe that the Food and Agricultural Organization of the United Nations warned earlier this month that more than a third of the country’s wheat crop could be lost.

For decades, China has been able to produce enough grain to meet its domestic demand. But if China’s wheat crop fails this year, the government will likely use a part of its $2.85 trillion in foreign reserves to buy grain. If so, wheat prices, which are already high, could rise even further on the global market, to the detriment of poorer countries that rely on grain imports.

Just how big an impact Chinese demand might have on the global grain market remains unknown; for the most part, data on China’s agricultural production and its reserves are state secrets.

However, the U.N. estimates that in 2009, China produced twice as much wheat as the United States or Russia.

The threat to this supply is imminent: According to Xinhua, China’s official news agency, if no rain falls by the end of the month, this drought will be the nation’s worst in 200 years. 

© 2011 The New York Times Company

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).

Copyright 2011 The New York Times.

Last modified on Tuesday, 22 February 2011 09:08