Food

Concerns about general price increases continue to shift from one consumer good to another. Right now, people are focused on food prices. I think this focus will continue well beyond the current inflation crisis.

The issue with food prices are that their cost drivers are directly related to the climate crisis, supply chains, and global conflict. We talk about food as if it is somehow separate from these other processes. Usually because it is an essential part of life—unlike, say, a microchip for a car. While it would be great if this was the case, food has become just another commodity for global capital and that means it is treated much like microchips, plastic toys, and blue jeans.

The price of food, then, is not controlled by the state—for the most part. The exception are things like milk in Canada that have some supply management.

The supply chain for food can be as complex as the supply chain for putting together an airplane. There are many hands on your food before it gets to you and many processes it goes through. Each of these adds cost to the production process.

One part that many people forget when talking about food is that much of the cost of food was already baked-in based on the production of food the year before. Time is a big factor for food production and costs.

The current food system prices are not able to be modified much by the state—at least not without creating other problems.

And, while it is not untrue to blame "companies", it is much more complex than this and likely not anything one single company has caused. As with anything in economics, it depends on which ideological position you take what the cause and answer is to the current situation.

The neoclassical view of the economy is that there is perfect competition and the price of things is the natural price of things. The price is set by the cost of production (cost of inputs, and wages, debt payments, etc) plus a natural rate of profit.

The current price increases under this view are from interference in the private food market by governments (who are trying to keep their population fed). The orthodox proponents of neoclassical ideology do not really have a solution to the current issue as they see it as directly related to the causes of "inflation".

The post-keynesian position is that there is imperfect competition and the price of things is the natural price of things plus a monopoly mark-up or some other distortion in the price cause by monopoly power over the market.

This view points directly to "monopoly" providers of food, the monopoly owners of some food patents, and the profiteering on food by some distributors. However, this view cannot address the fundamental issues that the cost of food has actually increased.

Both rely on a natural price of the perfect competition market price.

So, neoclassicals say it is not the companies' fault. The post-keynesians say that it is partly a company's fault.

Frankly, I think there is a rather high bar to be able to say that there is monopoly behaviour in food pricing. And, from where I sit, there is no indication that there is monopoly behaviour in food price setting beyond some very specific examples of very specific goods.

Folks right now are pointing to profits of food distributors/sellers. It is true that they are making banner profits and this is a problem. However, there does not seem to be anything more insidious about these companies' behaviour this year versus a few years ago.

In fact, much of the current profit rates of many of these distributors is from a type of buying cheap selling dear. That is, the food that these firms purchased was cheaper when they bought it, but the market price of those foods stuffs increased with inflation at selling time.

While this can legitimately be called profiteering (that is maximizing profits), it is hardly has to be monopoly behaviour that has caused it. We will see if profits come down as these distributors have to re-stock their shelves.

So, what is really going on?

For the classical view, let us go back to some basics. Let us say that the price of the production of food is the price of the capital inputs and labour inputs. Inputs include the price of seed, planting, maintaining, and harvesting. That is to say, the "value" of the food being exchanged for money is the product of those things.

And, because we have a global value chain for food production, the value creation of food also include the inputs transport, fuel, storage, and the labour that goes into that. These costs are not insignificant.

There is disruption in those value-creation chain right now which increases costs in a real way.

Climate change, war, de-globalization, price of oil, shipping costs affecting input prices of seed, machines, and fertilizer. Labour shortages, the degree to which migrant workers are willing to do work for basically nothing increases the price of labour.

Disruptions in the "normal" goods supply chain increase prices. Buying new storage, hiring new people, finding and paying new people in different parts of the world to do these things, purchasing inputs from different suppliers and dealing with debt and risk cost increases.

All these mini crises for inputs increase the cost of production and distribution of food too.

Together, these costs put a floor on the price. There is no ability for food producers and distributors and sellers to sell at a loss for an extended period of time.

However, this floor on cost of inputs does not set the price of selling food. The price floor of selling is the highest marginal cost of production, not the lowest.

The difference between one company's costs and the highest marginal cost is the profit made by these companies. If the company produces at the highest marginal cost, it makes no profit.

There is a ridiculous amount of competition in this value chain for food production. This competition puts downward pressure on costs—companies spending too much on production and not pivoting on investment in new technology or too expensive debt/labour go out of business or are purchased by larger capitals.

All these pressures make the band of low cost to high cost small. The profit margins on food are very small and only work at scale within the global food production system.

So, profits might go up and down, but they are relative to the highest sustained marginal cost of production over the time-frame of production of food.

The key here on profits is the time frame: it runs between 3-10 years for most food products for producers and about 1 year for distributors (we are only talking food costs, not distributors' other costs if they sell other things).

In this analysis it is not one or another company that is the cause of high food prices. It is the value chain that has been developed under this form of capitalism that has created the problem.

It is called the Green Revolution. When it comes to food production, the Green Revolution was the global supply chain development of capitalism, the commodification of all food, and the heavy increase in the use of oil to produce food.

Much of the downward pressure on prices of food stuffs we have seen in the previous 40-50 years is about to end because that was all a result of shifting production from local labour to cheap labour from the periphery of the first world, oil, and automation. That "innovation" (debt) cycle is at an end.

The next cycle has not started yet. So, we are at a point where food will only get more expensive to produce as wealth is not able to be as easily extracted from nature and workers through profit subsidies, globalization, and pollution.

I think that the problem with the current economic and policy paradigm around food is that food is only able to be private profit-driven. This is because of the immense subsidy that the Green Revolution provided to producers and this subsidy hid the waste generated by the current system. Indeed, the subsidies created a system that purposely creates waste.

The only solution is one where that wasted food and energy is redirected towards the production of food that is consumed. This will take along time to accomplish and it is unlikely to be without major crises of its own. This is not the "collectivization" of food or the public ownership of food. It is a call for the intervention in the food production, distribution, and preparation of food system. This intervention is as necessary as the shift away from coal-powered electricity generation.

And, because it will be necessary for massive amounts of investment to be made, can only be done through state-supported investment that is of a non-profit nature.

In the meantime, it is is going to have to include supported supply chains and storage solutions that eliminate redundancies. Elimination of the food-energy competition such as ethanol production from corn and bio-diesel.

But, in the short term, food is going to get expensive as there is less of it because of climate change even if we did all the things that we know we should do.

In the next 30 years, unless there is a major push for local urban agriculture we will not have the food we need. The climate and global systems are going to change faster than people think and it isn't going to be nice.

Industrialized islands like the UK, New Zealand—and places like Cuba and Indonesia—are a good place to look at local food issues.

I think the UK is the main canary in the coal mine when it comes to food costs and localized production. UK companies and people have a lot of agriculture and a lot of purchasing power to buy food. If it is having trouble producing food for a not-so-fast growing population and cannot import food because it is competing with other countries for that supply, it is a major red flag that we are entering a very bad decade.

NFU calls for action on supply chain emergency

Government faces a stark choice: back British food production to secure a home-grown supply of sustainable food or risk seeing more empty shelves in the nation’s supermarkets, NFU President Minette Batters warned today.

• https://www.nfuonline.com/updates-and-information/nfu-action-on-supply-chain-emergency/