What does oil have to do with the price of bread? A lot

What does oil have to do with the price of bread? A lot

Globe and Mail

October 25, 2008 at 12:05 AM EST

LONDON — Our eyes have been fixed in horror on the price of oil, the price of gold, the price of the Canadian dollar, the price of bank shares, the price of our house, the price of credit. Fair enough: These are the yardsticks of the economic crisis, the gauges of the world's health.

But we ought to keep our eyes on the price of a loaf of bread. This, too, has been fluctuating wildly: The global price soared this spring to almost double what it was a year before, and then plunged over the summer and autumn by 40 per cent, along with most other food prices – proving, in a way we have never seen before, that food is a global commodity, completely linked to petroleum, metal and other tradable goods.

We're aware of this, usually in a marginal way, when we go to the supermarket or look at our weekly spending, but its connection to the larger crisis is elusive.

We might know, on some level, that the world's billion very poor people, who often spend up to 90 per cent of their household budget on food when it's expensive, are dramatically affected by these undulating prices. Earlier this year, there were pasta protests in Italy, baguette uprisings in France and full-scale food riots in Haiti and Cameroon.

But what does it have to do with the price of a loaf of bitumen? In other words, why have food prices come to track oil prices?

It's worth asking because, unlike petroleum (whose supply is limited and more or less fixed), there are things we can do about food. We just have to teach the world to stop thinking of it as being something other than a vital commodity.

At an emergency gathering of British, African and American experts on food security this month, I found myself sitting with a senior trader with one of those Wall Street investment banks that have been in the headlines lately. He explained to me, in staccato matter-of-fact delivery, what had happened to food in the past decade.

As a commodities trader, he said, he wasn't concerned with who was producing something, or why. He was interested in demand, and there are, in his world, only four demands: the creation of transportation, the generation of heating and power, the manufacture of materials and the provision of sustenance through food and water.

“Historically, these four demands never used to talk to one another – they were silent,” he said. That is, they lived in different worlds of pricing, depending on the amount of energy they could produce per dollar spent.

In 1995, natural gas traded globally at $2 per British thermal unit (the basic measure of energy), oil at $3 per BTU, aluminum at $8 and wheat, the benchmark food commodity, at $12. You would never meet a demand for, say, home heating by buying something that cost six times as much as gas.

“Then, starting in December of 2000, there was a great convergence,” he said. “Natural gas went first – the $2-per-BTU commodity exploded to $3 almost overnight – it hit the supply wall, and collided with oil. By 2004, oil moved its price up to $8 per BTU and linked itself with the metals market. Then finally, in 2006, oil, gas and metals moved higher and linked themselves with the food market.

“After that, we don't care what commodity you buy. We called it a bushels-to-barrels-to-BTUs convergence. Take corn: It can now create heating and transportation; it's actually very good for burning to generate electricity. It can create plastic or cardboard, so it's a source of materials. And finally, you can eat it if you want. It can meet any of these demands. And you can use petroleum to create plastics, or to create fertilizer to grow food – suddenly, we are indifferent to what commodity we are buying to meet our demands.”

So rather than mining, or logging, or digging oil sands, or farming, nowadays we are simply extracting an aggregated uni-commodity from the ground, one that can be deployed for almost any purpose. This means that food is no longer just food: It is speed and heat and enclosure.

It also means that the price of a loaf of bread now depends not just on how many people are hungry, but on how many people want transportation, heat and plastic.

Many people blamed the U.S. practice of using government money to subsidize the production of ethanol-based fuel for the rising grain prices. This is indeed an immoral practice: It hurts food markets, harms farmers in poor countries and produces a fuel of no ecological benefit. But, as that trader observed, corn and wheat are now linked to energy markets, with or without subsidies, like it or not.

As a result, there will now be more world demand for food, which should make it more expensive everywhere. The U.S. government predicts prices 10 to 20 per cent higher throughout the next few decades. But, unlike oil or metal, there is something we can do about this.

Much of the world's best farmland produces absolutely nothing. In Russia and Ukraine, 50 million hectares of extremely arable land went uncultivated last year, but they were part of the word's breadbasket 20 years ago. In Africa, huge swaths of extremely productive land have simply been abandoned because the farms have become too small, and too undercapitalized, to produce anything. And, because of poor infrastructure, an amazing 40 per cent of the world's food rots before it can get to market.

We need to find ways to get money into farming and make it into a desirable and productive business around the world – one that, unlike hedge funds, has a tangible benefit for people. That means getting people out of subsistence farming and turning agriculture into a medium-sized business that attracts intelligent people; it means opening up farm markets to investment; it means building roads and opening borders to make it possible to bring food to market.

Everyone agrees that the world could double the amount of food it produces. We need to do that now, before the uni-commodity ends up starving people.


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