A leading economist is predicting a global food shortage this year will affect all countries, all economies and all budgets.
While there are always winners and losers in a shortage, says Donald Coxe, he is concerned there will be more losers than winners.
"If there is a breakdown in food distribution and a continued escalation of food prices, we will begin to witness Engels Law - when food prices go up higher and higher, the effect is felt inversely to income. In other words the poor feel it worse," said the macro-economist while speaking at a Toronto CFA Society event in Toronto at the end of April.
With more than three decades of experience in the investment world, Coxe (who is based in Chicago) believes that the basic reasons for the shortage boils down to two factors: A rising global middle class that is adding meat and dairy to its diet, and an antiquated global agriculture system that relies on tariffs, subsidies and artificially suppressed production.
"Sure, there are people that say there is still enough food in the world, but that's rather like saying there is enough oil in the world, because they added in the oil in Russia, Venezuela and Kazakhstan," says the global portfolio strategist at BMO Financial Group.
He concedes that it is a good theory, but the reality doesn't prove the theory. Which is why Coxe is convinced that, despite political protestations around the world, a food shortage is starting to occur.
The "imposition of Hitler-style autocracy on the grain trade" is the first signal of a shortage, says Coxe.
He is referring to the export tax on soybeans in Latin countries, the quasi-embargo on exports in Thailand and the lifetime prison sentence imposed on anyone caught hoarding rice in the Philippines, to name but a few examples.
"We have never been closer to a free-market economy, but because the agriculture sector is crippled by autocracy, export bans and punitive taxes, we are moving away from the principles of a free market."
Coxe suggests returning to the supply-and-demand equation that often balances other sectors, although, he adds, "that might be a new concept for agricultural sectors."
Coxe played a leading role in implementing and developing agricultural programs 30 years ago, in conjunction with the Canadian federal government, and cannot be ignored.
As a result of that experience, Coxe is acutely aware of how large and how deep the subsidies to the agricultural sector go.
"We pay farmers not to produce. That's where many of these subsidies go," he explained. Yet, with another 100 million people joining the ranks of the middle class in China alone, Coxe questions the rationale of subsidizing a lack of food production.
He also refutes recent arguments that the coming food crisis is due to worldwide droughts, high fuel costs or speculators.
"There was only one drought [in 2007] and it had nothing to do with corn (or any other biodiesel-based grain)," said Coxe, who believes arguments that drought caused the shortage are "ridiculous."
Coxe lays more of the blame on green initiatives than weather.
China, Indonesia and Thailand recently asked the European Union (EU) to stop production of biodiesel, because the redirection of soy and other grains to the production of biodiesel was hurting their diets - their people could no longer afford the high prices for commodities in order to make staples in their diet.
"The EU's response was to appoint a committee to investigate the situation," said Coxe. "And then continued their biodiesel program."
If the lack of political will in the EU was not bad enough, the matter isn't even on the table for discussion in the U.S.
Coxe points out that Democratic Senator Barack Obama's home state, Iowa, is the second-largest producer of ethanol, yet this U.S. presidential hopeful is not the only politician ignoring the food-fuel link.
In fact, under current U.S. legislation, there "won't be much corn used for food, it will all go to ethanol," by the year 2015, says Coxe. "Now that's insanity."
Coxe suggests that all analysts begin to factor food and its associated costs into their forecasts. In this way, reports may actually rise above the bias, he says.
Yet, even if that does not occur, he is confident the statistics will speak for themselves.
"Maybe 50 million people die from this (food) shortage. Can you live with those statistics?" He also suggests that global governments begin to remove the barriers for food distribution.
"The agricultural sector is the most over-regulated industry in the world, with all sorts of subsidies and controls," said Coxe. "This means unimaginable layers of government involvement. For example, 43 per cent of the EU budget goes to farm subsidies for farmers not to produce. To produce less, not more."
Now compare this with the statistics, says Coxe. Wheat production rose one per cent last year; wheat consumption rose 1.5 per cent. Rice production rose one per cent last year; rice consumption rose more than two per cent - resulting in a 250-per-cent price increase.
"There have been food-related riots in over 30 countries already," says Coxe.
"The structure (of the agricultural sector) is an elaborate series of programs to protect farm incomes, but not one program is about producing more. This has got to change. We've got to do with agriculture what we have already done with metals and oil."
Coxe's trifold prescription to "fix" agriculture includes: Better food policies; significant and global changes in government policy; and smaller, younger, more flexible companies that can respond to the changing economic environment.
(Romana King can be reached at king@businessedge.ca)
