The Food Crunch

While Americans in 1980 were preoccupied with adapting to 1979's escalation of oil and gasoline prices, they were ambushed by a sharp run-up of prices of an even more basic commodity —food.

For all of 1980, food prices at retail were expected to rise about 9 percent from 1979, but by the third quarter they were increasing at an annual rate of almost 13 percent. Farmgate prices for corn and soybeans—key inputs to the nation's livestock industry—were up 35 and 23 percent, respectively, in 1980 relative to 1979.

This time it was no cartel of ill-disposed foreign producers that did the damage but an even less predictable and controllable antagonist—the weather. The United States was plagued by prolonged drought and unprecedented heat in major grain-producing areas, and the Soviet Union was hit by a cold, wet spring and summer, followed by heavy rain at harvest time. Corn production in the United States was down 17 percent from the 1979 level, grain sorghum production declined almost one-third, and soybeans were off 22 percent. Key wheat-growing areas were less seriously damaged, and wheat production rose 10 percent, an increase in harvested area more than offsetting a decline in yields. The Soviet Union was staggered by the second poor crop in a row, 1980's 185 million tons of grain production being only marginally above 1979 and a full 50 million tons below the target for the year.

These production declines came in a setting of continually rising world demand for food. In the developing market economies, inexorably increasing population combines with steady, if undramatic, growth of income and inadequate present levels of food consumption to assure year-in, year-out increases in food demand. As part of its opening to the West the Chinese government has stepped up grain imports in an effort to improve the diet of the Chinese people. And the Soviet Union sought to offset its production shortfall by importing 30.5 million tons of wheat and coarse grains in 1980, the same as in 1979, and more than double the amount in the preceding three years.

The increase in Soviet imports of grain occurred despite the partial embargo on U.S. exports to that country. Had there been no embargo, Soviet imports likely would have been still greater and the upward pressure on world grain prices even more pronounced.

The combination of rising world demand and lower production in the United States and the Soviet Union produced the escalation in food prices, stimulated continued growth in world trade in grains and soybeans, and caused a sharp drawdown in stocks of these commodities.

The figures for grains are illustrative. World trade was expected to reach 206 million metric tons for the year ending in mid-1981, continuing a trend that has seen the grain trade grow 6 percent annually from the average for 1972-73 through 1974-75, well above the growth of world production and consumption. The United States, the preeminent exporter of grain, with almost 60 percent of the world total, shared fully in this extraordinary increase in trade.

World stocks of grain were expected to decline sharply for the second year in a row in the 1980-81 trading year. In relation to demand, grain stocks in mid-1981 would be as low as in the food crisis years of 1973-74. U.S.-held stocks were expected to decline over 31 million metric tons, or 41 percent, from mid-1980 to mid-1981.

What do these events portend for the future of the U.S. and world food economies? The U.S. Department of Agriculture sees retail food prices up 10 to 15 percent in 1981 from 1980 levels. Estimates for other countries are not available, but, clearly, prices in most will be higher. The Soviet Union likely will seek to replenish its grain stocks, adding significantly to the growth of world demand for current consumption.

The combination of continued strong growth in world demand and low world stocks means that the U.S. and world food economies are especially vulnerable to declines in world food production, or even to below-average growth. If the United States or other important growing areas have poor production years in 1981 or 1982, a further run-up of prices would be all but certain.

In 1978 many U.S. farmers were pressing for political action to offset grain surpluses and low prices. Writing in this space at that time, we observed that a poor crop year in the United States or elsewhere, combined with the strong and steady growth in world demand for food, could quickly dissipate the surpluses and escalate prices, reminding us that the world food problem still was far from solution. The events of 1980 provide that reminder, should anyone have forgotten.