Monday, January 26, 2015

The Global Food Market, Political Instability, and Fertilizers

In a globalized world, we all buy our food off the same market. The supply and demand of our world's food stocks dictate the price of food from New York to Sidi Bouzid.  This can be a good thing.  If crops fail in country A, food can still be purchased on the world market from other countries.  The global food market can also be a bad thing.  If country A depends on imported food and then one day countries B, C, D, and E are willing to pay twice as much for this food, the inhabitants of country A better hope they or their government can pony up the extra cash. The following graph from The Economist illustrates just how much of the world is not able to feed themselves without imports.

Even worse than being unable to afford food imports is when a country is actually producing enough food for its inhabitants but because the global market reaches everywhere, the food is exported to places where people are willing to pay higher prices.

The Irish Famine of 1845-49 is a classic example of this scenario. From Ireland's Great Hunger Museum comes this quote:

"'Although the potato crop failed, the country was still producing and exporting more than enough grain crops to feed the population. But that was a “money crop” and not a “food crop” and could not be interfered with.' Up to 75 percent of Irish soil was devoted to wheat, oats, barley and other crops that were grown for export and shipped abroad while the people starved."

To give you an idea of the level of this injustice, here are a few stats about the amount food leaving Ireland. In the first nine months of 1847, a year when over 400,000 Irish starved, 822,681 gallons of butter were shipped to England.  Even more outrageous is the 1,336,220 gallons of grain derived alcohol that were exported during this same 9 month period.

This phenomenon of food exports from hungry regions of the world happens to this day.  A clip from the great movie, Darwin's Nightmare, illustrates the point quite well:

It's safe to say that the global food market dictates how most people eat.  Sometimes price surges in the market make it exceedingly hard for people to access food.  When people are unable to feed themselves, social unrest often follows.

This graph is from the article Freedom to Riot - On the Evolution of Collective Violence.  It uses data from the book Social Unrest and Popular Protest in England, 1740-1840 by John Archer.  It shows that major outbreaks of social unrest coincide with increases in the price of wheat.  The Y axis should actually read "Average Price of Wheat in Shillings in England and Wales" based on the data. Red lines indicate years with major outbreaks of rioting.  Although these price fluctuations probably had less to do with the global food market of the time period, the graph does show how social unrest and high food prices are related.

Food price spikes and unrest

This next graph is from the now well known paper of the New England Complex Systems Institute, The Food Crises and Political Instability in North Africa and the Middle East.
The dotted red lines indicate the outbreak of food riots and social unrest.  The inset is a graph of the FAO food price index since 1990.  The implication of this graph is that high global food prices helped spark the Arab Spring.  If we recall the first chart from The Economist, the Middle East and Africa are heavily reliant on food imports.  Spikes in global food prices therefore put a lot of strain on this region.  For a more detailed analysis of how declining agricultural production in the midst of the 2011 price increase helped spark the Syrian civil war, check out this older post.

How do fertilizers play into this?  From the graph below it's clear that fertilizer prices spike at the same time as the dramatic increases in the global food prices in 2008 and 2011.   The following graphs were made on using World Bank Commodity Price Data.

The increase in fertilizer prices in 2008 was due to a lot of different factors.

Economic growth in developing countries during this period was accompanied by increased demand for meat and other animal products.  The increased livestock production needed to support this diet requires a lot of grain, and this increase in demand for grains in turn led to more demand for fertilizers.  Subsidized biofuels pushed grain demand even further.  In 2007, 18-20% of all corn grown in the US was used for ethanol.

With the demand for grains and other foods pushing food prices up, farmers in developed countries responded by applying more fertilizer in order to increase yields and profit.  There are diminishing returns on increased fertilizer application, but when corn was at a record high of $6.12 a bushel in 2007, the marginal extra yields from more fertilizer would cover costs and then some.

In the midst of this rise in fertilizer prices, China placed high tariffs on the export of fertilizers.  At the time, China was the world's second largest exporter of phosphorus and the largest exporter of urea.  This was certainly a good move for Chinese farmers as it protected them from the price surge on the global market, but it drove prices for the rest of the world even higher.

Knowing how important easy access to fertilizers is for political stability, numerous countries subsidize fertilizer costs.  This is the case in India, and as detailed in an earlier post, in Malawi.  When fertilizer costs increase, these governments are forced to dig deep into their pockets in order to continue the programs.  The upshot of this is that farmers in these countries do not respond to price increases by using less fertilizer as they still pay the subsidized amount.  Consequently the global market for fertilizers stays high as there is no let up in demand in these countries.

Energy prices also play an enormous role in the fluctuating cost of fertilizers. Synthetic nitrogen production requires 2-3% of the global natural gas supply.  Energy costs were very high in 2007-2008 which of course pushed N fertilizer prices higher.

This is not the only time energy prices have pushed up the price of fertilizers and food.  The graph below charts the food and fertilizer price indices from 1960.  It's possible to see how the 1973 and 1979 oil crises affected both the cost of food and fertilizer.

Eventually, the record breaking fertilizer spike of 2008 subsided.  Farmers were simply unwilling or unable to pay such high prices and fertilizer use decreased.  A similar spike happened again in 2011 along with a more sustained increase in food prices.

There are so many factors at play in the volatile global markets for food and fertilizers.  It's not possible to simply point to rising fertilizer prices as the cause of rising food prices when there are several other important drivers for the supply and demand of global food stocks.  Even with these other factors, there is a definite link between fertilizer prices and food prices. It's very hard to have cheap food when fertilizer is expensive.

Fertilizer price volatility hurts poorer farmers the most. When fertilizer doubles in price a lot of these farmers simply cannot afford to buy fertilizer and consequently produce much less food for themselves and local populations.  When this is combined with an increase in food prices on the global market, these populations have a very hard time accessing food as both domestic and imported sources are expensive.

Because of the dramatic '08 spike in the fertilizer index on the graph above, the food price index spike may not seem that bad. Indeed, for citizens of the US, who pay less on food than anyone else in the world, a mere 6.8% of annual income, the food crises of '08 and '11 were not a big problem.  Say that you lived in Algeria though. You're making the average yearly income of about $4000 USD.  In the fall of 2006 you paid $887 a year on food for your family.  By June of 2008 it would require $1,752 to buy the same food.  Unless you managed to substantially increase your income in that short time period, you're really hurting.  To make the example even clearer, the Algerian situation can be put in terms of a US salary.  If you're making $50,000 annually, in 2006 you would be spending $11,118 on food.  By the food spike of 2011 you're now spending $22,405 on food.  If this happened to consumers in the US one can imagine how angry and unstable the political landscape would become. We have a relatively well functioning democracy which helps to manage the displeasure of our populace. During the food price surge of 2011, there was no political outlet for the enormous frustration that built up under the autocratic regimes of the Middle East.  Within a year the Arab Spring would topple many of these governments:

I think the take away from this is that there is a very real link between political stability and the global food price index for countries that import much of their food. Furthermore, volatility in the fertilizer market contributes to high food prices.  To avoid political problems stemming from dramatic food and fertilizer price increases, domestic self sufficiency in both food production and fertility needs is critical.  The political will to set export tariffs on these products to prevent food/fertility from leaving the country in times of scarcity is another important part of maintaining stability.  Certainly, becoming self-sufficient in food and fertility needs is not something that happens over night, but if the food crises of 2008 and 2011 are a phenomenon that will happen again, countries would do well to start working towards these goals now.

For further reading about the 2008 fertilizer price spike here are a few articles that offer different levels of analysis:

World fertilizer prices drop dramatically after soaring to all-time highs

Factors Contributing to the Recent Increase in U.S. Fertilizer Prices, 2002-08

World fertilizer prices surge 200% in 2007