Rising food prices look set to continue.
Listener: 17 November, 2007.
Keywords: Globalisation & Trade;
The boom in dairy product prices is a consequence partly of overseas drought and partly of Americans using their maize to make biofuels, leaving less for their cows. The same condition is depressing the price of meat as farmers slaughter cattle at increased rates in response to drought and higher feedstock costs.
These changes come on top of a longterm trend that began in the late 1980s, in which food prices seem to have been rising relative to manufacturing prices. There are fluctuations about the trend ratio – called the “food terms of trade” – which make it difficult to interpret the data, but the fall through the 1950s to the 1980s seems to have halted.
This may end one of the difficulties our farmers have faced. Competition (and international protection) saw much of their productivity gain go to foreign consumers in lower (relative) prices, rather than to the farmers in higher profits. The poor return to New Zealand farmers meant that the economy as a whole did not perform well, either.
There are theoretical reasons to suggest that this downward trend may have finished. They are set out in my book Globalisation and the Wealth of Nations, but consider this simplified explanation of why food prices may favour farmers more in the future.
Think about the Chinese peasants who go to work in a factory. Their wages are low, so the price of their product is lower than, say, the US manufactured price, even after the addition of transport costs. Still, the peasants are better off with the factory job, if impoverished by US worker standards, so they want to eat more food of better quality. Yet because they are no longer working the land, less food is being produced. Extra food exports to China push up the international price of food relative to the price of manufacturing, so the food terms of trade rises.
The more complex story is about the differences between the early and later stages of globalisation. If my model is correct – and it has the merit of being consistent with the historic facts – then we may expect rising relative prices for food for some decades to come, albeit with fluctuations about the trend. Even so, the model of world globalisation is too simple. It considers only two sectors, ignoring other resources (especially energy) and services, which complicate the picture.
The book is the outcome of a three-year project supported by the Royal Society’s Marsden Fund. It was unable to extend the study to the multi-sectoral model because funds were short and the topic was not a priority. As a researcher I am disappointed. So I slowly work on globalisation in my spare time. (Perhaps others may also feel that having a better understanding of a major influence on New Zealand’s economic performance – not to mention society as a whole – might even result in a better growth record and more for the Marsden Fund.)
The future path of the economy under higher food prices is not obvious. It may cause some of our existing non-resource export industries to move offshore. That might explain why some of our clothing production is now moving to Asia, although fashion design remains here.
Such a judgment has to be tentative until there is more understanding of what is going on, how New Zealand is engaging with globalisation, and how we might respond. Globalisation and the Wealth of Nations may be a foundation that helps you to understand these momentous forces, but it is not the last word.
Unless we do the research, we are likely to follow fashion – and to make mistakes. For instance, many farmers are considering conversion of their land to dairying. But dairy prices may fall a bit before they resume a rising trend, whereas meat prices may catch up as soon as the high rates of slaughter cease – which they must as herds diminish.
Other opportunities remain. A quarter of a century ago one of our top vineyards, Ata Rangi, was a dairy farm. I doubt there’s any need to convert it back.