Inter American Development Bank: food price inflation

On the last day of the Inter American Development Bank meeting in Miami, the take-away for the 6,000 attendees is clear: the US economy is in trouble and the effects on the hemisphere are to follow. But something else is happening, beyond the implosion of housing markets and the shattering of confidence in debt and the US dollar.

In Port au Prince, rioters have taken to the streets to protest cost increases in food. And not just Haiti. Food prices are spiking, in case you haven’t noticed at your supermarket lately.

AP reports today in advance of the World Bank spring meeting, “Rising food prices, which have caused social unrest in several countries, are not a temporary phenomenon but are likely to persist for several years, World Bank President Robert Zoellick says. He says strong demand, change in diet and the use of biofuels as an alternative source of energy have reduced world food stocks to a level bordering on an emergency.”

Here is what is going on.

First of all, the growth of Asian economies means that the cost of fuel will continue to rise, based on a limited and even dwindling supply of oil. Industrial food production, that depends on long-distance transportation cost inputs, is only efficient so long as fuel costs are low. That is no longer true.

The threat of further tightening of oil supplies, by any disruption, is forcing commodity markets upwards. At the same time of rising demand for fuel, US energy policies have encouraged alternatives—like growing corn for fuel.

Changes in seasonal growing cycles due to global warming are affecting crop productivity around the world at the same time a massive amount of acreage formerly dedicated to growing grains for food has been converted to subsidized fuel.

As Time Magazine notes, “The U.S. quintupled its production of ethanol… in the past decade, and Washington has just mandated another fivefold increase in renewable fuels over the next decade.” (“The Clean Energy Myth, Michael Grunwald, April 7, 2008),

These immutable facts; climate instability and unstable fuel supply argue for certain measures to be taken as soon as possible.

First of all, reverse the subsidies for ethanol based fuel from corn and sugar. Grunwald notes, “The grain it takes to fill an SUV tank with ethanol could feed a person for a year.”

In Latin America, as in the United States, effort is required to change farm policies to from industrial food production to encourage growing local sources of food.

It is wrong to blame third world nations for failing to tame the conversion of environmentally sensitive lands to agriculture: in Miami, we are powerless to stop the conversion of agriculturally important lands to hardware stores and office space outside the Urban Development Boundary.

Power generation needs to be re-organized to maximize the generation of power at the consumer level, whether through the combination of wind, solar and other new technologies.

Paradoxically, this may be more easily accomplished in lesser-developed nations where industrial scale investment in infrastructure has not taken root. Big electric utilities like Florida Power and Light use renewable energy investments—at least in this state—as a fig leaf for plans to massively expand capacity.

The fact is, the rules of the game have changed. This may be hard to see, through the forest of the credit crisis.

Time’s Michael Grunwald writes, “The biofuels boom, in short, is one that could haunt the planet for generations—and it’s only getting started.”

Inflation in the cost of food may have nothing to do with financial derivatives and the mistakes of Alan Greenspan, but you don’t have to be chief of the Federal Reserve to know that food costs are significantly adding to the economic storm.