Back on December 18, 2007 the cover story for The Economist magazine was: “The End of Cheap Food.” If you are like most of the readers of this website, you are now painfully aware that, at least for grain based foods, this can most assuredly be the new reality. But how widespread will this run up in food costs be? If you consider the wide number of food products that are ‘grain-based’ you suddenly realize how much of an impact rising grain prices are going to have. Certainly the cost of bread and cereal is going to rise, but so to will the cost of milk (the cows are fed grain), eggs (the chickens are feed a diet largely composed of grain), and beef, pork, chicken (all are fed grain).

Grain is consumed in the manufacture of so much of our food that, if grain prices continue to rise, so too must most of what we eat. We are truly entering into a time of no more cheap food. That is not such good news for those of us in the wealthy world (1st world if you like that term). We may not like it but we can adjust our spending habits to absorb this price increase and still not have our quality of life suffer too much.

But what about developing countries and those who live below the poverty level throughout the world? (In India alone it is estimated that 29% percent of it’s 1.1 billion people live below the poverty level.) Just yesterday (Monday, February 25, 2008) the Financial Times’ headline read: “UN poised to ration food aid as prices soar”. The sub-title read “Poor countries pay 35% more for cereal [grain] imports.” It is a world wide problem affecting everyone, with the least well off being affected the most.

But what is driving the cost of grain to appreciate so rapidly? The main article from the Economist presents the paradox that many of you who follow the grain markets have already realized. As reported by The Economist, according to the International Grains Council this year’s total worldwide cereal crop will be 1.66 billion tonnes, the largest on record and 89m tonnes more than last year’s harvest. And here in the US the National Association of Agricultural Statistics (NASS) published in Jan 2008 that 2007’s corn harvest was the biggest of all time: 13.1 billion bushels, beating the previous record from 2004 of 11.8 bil bushels. Hence the paradox:

“That the biggest grain harvest the world has ever seen is not enough to forestall scarcity prices tells you that something fundamental is affecting the world’s demand for cereals”

The Economist and others basically equate the problem with two fundamental changes that are happening in the world today, and it is these two changes that are driving the world’s rapidly increasing demand for grain. The first change that is taking place is increasing wealth in the most populous countries in the world: India and China. With increasing wealth comes additional disposable income, income that can be used to purchase food items that are above and beyond the basics needed for survival. These ‘luxuries’ increasingly include meat, which directly increases the demand for grain to feed these animals. Again, from The Economist:

“The use for grains for breads, tortillas, and chapattis is linked to the growth of the world’s population. It has been flat for decades, reflecting the slowing population growth. But the demand for meat is tied to economic growth and global GDP is now in its fifth successive year of expansion at a rate of 4%-plus”

Ask any vegetarian and they will quickly tell you that meat production is a terribly inefficient way to supply the body with protein. It takes more grain if you eat it transformed into meat than if you ate it ‘directly’ as bread. The ratio of grain consumed to meat produced is roughly 3 to 1 (3 pounds of grain yields 1 pound of beef). Certainly not all grain is suitable for human consumption and this is largely what is fed to animals. But, with the global amount of arable land available for grain production passing it peak (and shrinking as the planet warms) and meat consumption rising, more ground is being converted to animal feed production to meet this growing demand which puts unavoidable upward pressure on grain prices.

But the rise in prices of grains has not been gradual, as increasing wealth in the developing world surely has been. The other change that has taken place is the increasing demand for corn based ethanol to fuel our cars. Again, from The Economist: in 2000 around 15 million tonnes of America’s corn crop was turned into ethanol, this year the quantity is likely to be around 85 million. That’s a 6-fold increase and is the principle reason behind this year’s sharp run-up in grain prices.

Corn for ethanol places another demand on our grain production and supply system, increasing the price of all grains. As we saw earlier, there is only a finite amount of ground suitable for grain production; in other words: arable ground is a scarce resource. That ground will be planted with whatever mixture of crops will yield the greatest return for the land owner/farmer. The situation that is unfolding here in the US is a land race, a competition over which grain is going to be planted. Will the farmer plant grain for humans, animals or cars? Regardless of what they plant it is almost a sure thing that, owing to all the need for grain, prices will not only continue to rise in the short term, but remain high for years to come. (The US Dept of Agriculture reports that we should see 2-3 years more of high cereal prices.)

So, while all the above sounds plausible, are we really going to actually see this affect the price of our foods in stores? Unfortunately, the answer is we already are. In January (2008) American consumer prices were up 4.3% on a year on year basis with food and energy accounting for 2% of that increase.