First Principles Approach to Food Security

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Prof John Freebairn's talk from the Australian Agricultural & Resource Economics Society's event "Reframing the Food Agenda: Setting the Scene for Australia" held August 19, 2011

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First Principles Approach to Food Security

  1. 1. First Principles Approach to Food Security John Freebairn University of Melbourne AARES, Adelaide, 19 August 2011
  2. 2. Food Security• What is food security? – Largely about the availability and affordability of food (FAO) – Also, can include food safety, nutrition, variety, and quality of eating experiences – Recent experience as base case• Largely boils down to price and quantity – Aggregate – Distribution, or expenditure relative to income• Much of the story can be seen in terms of the demand for and supply of food
  3. 3. Supply and Demand for Food to Explain and Forecast Food P and Q• Models of – Global supply and demand – Australian supply, demand and trade• Primarily focus on trend and short term factors shifting supply and demand to – Explain trends and fluctuations in P, Q and food expenditure as share of income over last 70 years – Framework for forecasting and policy analysis for the future decades
  4. 4. General Model Framework• Food demand Qd = f(Pr, Pop, Y, Policies, ….)• Food production Qs = f(Pf, Land, Climate, Var. Input Costs, Technology, Policies, ….)• Food balance Stocks(+1) = Stocks + Qs – Qd – wastage• Farm and food price links Pr = Pf + f(Var. Input Costs, Technology, Tastes)
  5. 5. Food Demand Qd = f(Pr, Pop, Y, Policies, ….)• Price (Pr): close to unity elasticity for the poor and falling with income• Population: unity elasticity• Income (Y): less than unity elasticity, but with shift to higher proteins, variety and quality, an important shifter due to economic growth• Policies: in recent years extensive subsidies for conversion of food into biofuels
  6. 6. Food SupplyQs = f(Pf, Land, Climate, Var. Input Costs, Technology, Policies, ….)Stocks(+1) = Stocks + Qs – Qd – wastage• Largely a competitive industry• Price (Pf): low elasticity in short run for production, but cushioned by changes in stocks• Land and other natural resources: limited supply and competing with environment• Variable inputs: agriculture has to compete against the rest of economy, including rising labour cost• Technology: key driver of supply; genetics, machinery• Policies: on input and output markets, environment• Wastage: substantial in both developed and developing countries, but for different reasons (10-40% of Qs)
  7. 7. Prices and Food Supply ChainPr = Pf + f(Var. Input Costs, Technology, Tastes)• Off-farm transport, processing, distribution, etc is highly competitive. Use general economy labour and capital inputs and farm product• Farm or producer price, Pf, is a small share of the retail or consumer price, Pr.• Off-farm value-added to food has a high income elasticity• Pr is more stable than Pf. Associated with – More stable priced of-farm inputs – Agribusiness, wholesalers, retailers, etc practice price averaging and smoothing
  8. 8. Global P and Q Outcomes S1Real food price P1 D1 Q1 Food production per year
  9. 9. Global Trends over Last Century• Food supply has shifted out faster than food demand with a trend fall in terms of trade (RBA, Bulletin, June 2011).• Food share of total expenditure falling in most countries. Key role of growth of Y.• But, over one billion people are hungry today• Short term price spikes around early 1950s, early 1970s, 2008 and now. Associated with low levels of global stocks (Wright, 2011)
  10. 10. Global P and Q Outcomes Over Time S1Real food price S2 P1 P2 D1 D2 Q1 Q2 Food production per year
  11. 11. Australian Production, Consumption and Trade DaPrice ofAust. Food Sa P D = Da + Drow Qd Qp Australian consumption, production and trade per year
  12. 12. Australian Story• To a large extent a small country trader with both food imports and exports, but a net exporter• Strong productivity growth on- and off-farm• Our food prices largely reflect world commodity prices• Importance of off-farm marketing inputs means stable retail prices• For most Australians, food expenditure less than 20% of total expenditure. But, fringe group at risk of poor nutrition. Growing obesity problem.
  13. 13. The Future• Will the experience of the 20th century repeat – Downtrend in relative food prices with technology beating population and income shifts – And with occasional self-correcting price spikes?• Consider likely shifts in demand and supply
  14. 14. Demand Shifts• Population growth from current 7 billion to 9.3 billion by 2050, and then level off (UN)• Higher incomes, including shift to higher protein food products Together, FAO estimates a 70% increase in demand by 2050• Will policies to subsidise food conversion to biofuels and fibres increase or decrease?
  15. 15. Can Supply Shifts Match the Demand Growth?• Land: not a lot more, and competition with environmental and urban (minerals?) uses• Water: as above, but big technology opportunities• Weather: climate change and adaptation• Technology: GMO; catch up to best practice• Wastage reduction• Key role for policy Productivity growth the big player
  16. 16. Key Roles for Policy to Encourage Productivity Growth in Food – Best use of resources, including land and water – Alternative uses of natural resources – Funding of and adoption of new technology – Open global competition and flexible markets – Clarification and simplification of regulations (Productivity Commission) – Redistribution by appropriate instruments – Obesity

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