High energy prices also have an impact on food and agricultural commodities.
“There are trucks, tractors, water pumps and a host of other machinery used in agricultural production which run on diesel or gas,” said Baffes. “Fertiliser production also uses a lot of energy. There are two types of fertilisers: one is made using mineral extraction and the other is produced from either natural gas or, in the case of China, coal.”
Again, the impact is not felt evenly across the world. Food-importing countries, and those which need to transport food long distances, are more exposed to higher price inflation because of energy costs than those with fewer food transport needs.
Security is expensive
The disruption that has rocked commodity markets in 2022 is leading governments to redouble their efforts to become self-sufficient – both in food as well as energy.
Relying less on imports, however, has implications for food costs.
“In an ideal world, commodities will flow to the nearest people or places with the shortest transport cost,” said Nagle. Instead, he notes that concerns over energy security is distorting trade patterns and pushing up transportation costs. “To the extent that this makes markets more costly, it will also serve to push up prices, ultimately for the consumer as well.”
The focus on energy security is also threatening to delay global efforts to address climate change. Warmer temperatures threaten agricultural yields through drought and more severe weather events, so the energy transition is crucial to keeping food prices stable going forward.
Some climate-focused initiatives, however, may be making food supply problems worse. Baffes recommended diverting production from biofuels to food commodities if food supplies are running scarce.
“According to our calculations, about 3-4 per cent of global arable land is allocated to producing biofuels and ethanol, but these only contribute 0.6-0.7 per cent of energy supplies,” said Baffes. “I would say the math is against biofuels – we do a lot of damage on the food supply side and only get a little benefit on the energy side. Moreover, quite a bit of research has come out recently questioning whether biofuels have an environmental benefit in the first place.”
Apart from the supply-side risks looming over food commodity markets, on the demand side, perhaps the biggest pull will be China, which accounts for nearly a fifth of the world’s population.
Prices of soybean and corn, which are used in animal feed, are especially sensitive to Chinese demand, which has been growing strongly to feed rising local demand for meat consumption.
China’s influence on global food prices becomes clear when there are short-term disruptions in consumption. Baffes recalled the downward pressure on corn and soybean prices when African swine flu swept through China in 2018, crippling pork production. More recently, China’s short-lived ban on US soybean exports contributed to renewed price volatility.
The case for cooperation and innovation
Global demand for food is set to continue rising as the world’s population approaches 9.8 billion in 2050 and 11.2 billion in 2100. With supply already a source of uncertainty, the prognosis for food prices does not seem good.
There are reasons for optimism, however.
“The food export restrictions imposed recently were less stringent than those after the 2007-08 crisis,” said Baffes. “I would like to think this was largely the result of efforts by international organisations and the financial press to bring this issue to the forefront early on this time around.”
Innovation could also help see the world through its food crisis. Nearly half of all people in the world arguably owe their existence to the invention of synthetic fertiliser.4 But a lot of the world’s fertiliser production currently goes to waste, contaminating groundwater instead of supporting crops.
Baffes highlighted the potential of emerging technologies that enable farmers to use much smaller quantities of fertiliser to achieve the same outcomes – thereby also contributing to reduced energy usage in the fertiliser production process.
“There is quite a bit of room for governments and industry to work together on developing such technologies to not only ensure food security, but also help the environment,” he said.