Asians by the millions are demanding better food. The growing Chinese middle class is eating more beef, pork, and poultry than ever before. Grain bins around the world are running low and commodity prices are soaring. Is this the beginning of an era marked by chronic food shortages and periodic famines?
There are genuine reasons for concern. Worldwide demand is surging way ahead of supply as protein-hungry people in developing nations upgrade their diets. Food prices will be pushed higher in the coming decade, which will be painful for low-income people the world over, especially in the food importing countries of Africa and Asia. The everyday price volatility of agricultural commodity markets, dependent on such fickle factors as weather and the whims of speculators, will increase, especially since stockpiles are smaller. Temporary price spikes will become commonplace and will spur inflation fears in the financial markets. For instance, in the U.S., most economists expect the recent rise in food prices will add at least several tenths of a percentage point to consumer price inflation.
But don't push the panic button. The booming global demand for food stems from rising real wealth in China and elsewhere in the developing world. Higher prices are turning farming into a growth industry. With one-quarter of the world's productive capacity in grains, American farmers are seeing their efficiency rewarded on a global scale. U.S. agricultural interests will invest more in new technologies to increase farm productivity. Europe, Latin America, Australia, Canada, South Africa, and other breadbaskets of the world will find their output in demand on world markets. What's more, higher prices will entice farmers and entrepreneurs to open up new sources of supply. China is widely expected to start investing again in its farm sector after a long lull. The former Soviet Union, where grain production has dropped by about 20% over the past six years, could eventually put its farmhouse back in order.
Of course, it will take time to raise agricultural production in the former communist nations of East Europe and the former Soviet Union, as well as in much of the developing world. It's not just a question of turning more acreage into farmland. Other bottlenecks will need to be overcome, such as building a better transportation infrastructure. Farmers in many parts of the world need stronger private property rights before they take the risks of planting more crops, too. Still, allowing the global markets to work is the best way to get consumers the food they want.
The real problem is not economics, but politics. Many countries are leery of being dependent on food grown outside their borders, even when it makes eminent economic sense. That's why some spend a fortune producing wheat or corn that's available more cheaply through global markets. But those ignoring the principle of comparative advantage in the name of self-sufficiency risk undermining their economic growth by investing their capital less efficiently. America's new agriculture policy is the right policy move for the new economics of food. Farmers now have more flexibility to meet rising demand and the ability to pay greater attention to consumers.
So long as politicians around the world resist the temptation to tamper with the booming international trade in food, agriculture will attract more investment. Higher rates of investment will lead to bigger crops. And the weather gods permitting, bigger supplies will limit the rise in the price of food worldwide.