Famine Continues to Stalk the Earth

By David L. Brown

Wheat, the Staff of Life

Wheat, the Staff of Life

We’ve talked here before about the fact that the world’s supply of basic foodstuffs is falling short with production barely able to meet demand. Now wheat prices are soaring due to drought in Russia, Ukraine, Kazakhstan and Australia, added to excess rain in Canada that has taken 13 million acres out of production this season.

Wheat futures on the Chicago Board of Trade experienced a 42 percent increase just during the month of July, the biggest monthly percentage gain since the CBOT began keeping records in 1959. Wheat contracts jumped by $1.97 per bu. in July, with September futures closing on Friday the 30th at $6.615 per bu. This is not an all-time high—wheat reached the eight dollar level during the food crisis of 2008—but the end isn’t in sight and more increases are expected as bad news continues to come in about yield expectations and traders keep bidding up the price.

Now as one might expect the press reports on this story raise the specter of, well, higher prices for bread and pasta in the grocery store. Nowhere is the word “famine” mentioned in the stories I read. It’s all about us, you see, and how this might impact our family budgets., a relatively minor fact if you want to know the truth. You may remember we went through a similar period of angst two years ago when the price of wheat was a concern, with reports of rioting in Italy because pasta prices had jumped.

Let me put this in perspective. A bushel of wheat weighs 60 lbs. When wheat prices hit that $8 range in 2008, the North Dakota Wheat Commission estimated that the farm value of the wheat in a typical loaf of bread was about 20¢, up from a previous range of 12-15¢ so the actual cost of a loaf of bread represented by the wheat it contained actually rose by just 5¢ to 8¢ — hardly cause for panic. The March 14, 2008 Wheat Commission news release (read it here) concluded that the extra cost for a family that consumed one loaf of bread and one pound of pasta per week would be about $20 a year. Actually, my calculations are even lower (+8¢ per loaf or packet of pasta, times 2/week times 52 weeks equals just $8.32). This shouldn’t even be considered as news, and little more than a rounding error in family budgets.

But what’s the real story? It’s famine, because it’s not the price of wheat that matters, but the supply. The fact is that a shortfall in wheat production will mean there won’t be enough wheat to satisfy world demand. About a third of the people on our planet rely on wheat as their major foodstuff, the “Staff of Life.” Many of these people live in poor nations and must buy their grain or rely on food aid from rich nations.

The confusion with availability of food and money is a sign of our misguided emphasis on monetary factors. Clearly, when there isn’t enough food to go around, money cannot solve the problem. In other words, actual food cannot be magically transformed from the ether by the application of paper dollars from a printing press. Sadly, humans can’t even eat the money, so there’s trouble ahead for many in the poor regions of the world.

As far as we here in the comfortable West are concerned, the price of wheat will be bid up as is presently taking place until demand drops to meet supply. That occurs when some potential consumers conclude they cannot afford to buy wheat at the higher price. The first to reach that point will be the poorest of the world.

Another way that reports mislead us is by conflating percentages with actual values. Let’s imagine a worst-case scenario in which wheat rises to $20 per bu., or about four times the recent price range. Wheat will sell for 400% of its previous price. Whoa, a terrible disaster, right? Well, maybe not. Using the factor noted above where $8 wheat was equivalent to 20¢ per loaf, at $20 the farm value of the wheat in a loaf of bread would rise to 50¢. That’s a little less scary. And if a premium loaf of bread sells for $3, and other factors don’t change (they will, but never mind), then although the price of wheat will have risen by four times, the cost will add only about 16 percent to the cost of the loaf of bread.

Taking it one more step, if a family consumes one loaf of bread and one box of pasta per week, and the wheat they contain costs an extra 50¢, the cost is just $2 a week or $104 per year. That’s under a worst case assumption that is probably quite a bit higher than wheat prices are likely to reach, because the poor will be priced out of the game before prices reach that lofty height.

Prices even in the range of 2008 would be devastating to several hundred million people who depend on wheat and have few if any alternatives. And to repeat: Money cannot solve the problem; food aid agencies cannot create more food simply by throwing money at the problem. Rich nations will ante up whatever it takes to get as much wheat as their populations demand and others will be left without. For more on this point, see my essay “Money Won’t Solve Looming Famine,” posted June 2, 2009 here.

Not only that, but when the price of one commodity goes up it takes others with it as frustrated buyers seek alternatives. Thus, corn and soybean prices also rose last month, although not nearly not as much as wheat.

The specter Famine

The specter Famine

Folks, we are reaching Peak Food, and with population continuing to rise this is an unfolding tragedy. For the press and politicians to moan and gnash their teeth over the price of bread is beside the point, which is that many people of the world will go without enough to eat. Most of those same people are already malnourished, so a wheat shortfall will push them toward outright starvation.

As resources such as oil and gas decline, famines are probably inevitable. We haven’t seen much of that  ancient scourge of humanity in recent decades, but it’s fated to return, perhaps very soon. I’ll keep you posted.

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