Global Food Prices Inflation Highest Since 2011

According to the UN FAO, global food price inflation has risen for the 12th month in a row, and is now the highest since 2011, with food prices having risen by around 40% over the last year. It is yet another sign of the embedding of global inflation, resulting from the excess liquidity injected by central banks that is now washing out into global commodities markets.

Last month alone, the index rose by 4.8%, the biggest rise in ten years. But, back in 2011, the world was still recovering from the effects of the global financial crash of 2008, and from 2010, governments were imposing austerity to try to prevent economic growth expanding, which would have caused interest rates to rise, so crashing asset prices once again. In 2011, there was already a large amount of additional supply starting to feed into global food production, as a result of investments in new farms and opening up of new lands, in response to the large price rises, and food shortages of 2007. Today, that additional supply is already factored into markets, and in place of austerity, we have governments engaged in policies of fiscal expansion, and having pumped additional cash into consumers' pockets during government imposed lockouts. A large part of the current rise in demand has come from China alone, as its economy has restarted in recent months.

As the global economy grows rapidly, in coming months, as individual economies and regions restart after being locked down, that demand is likely to increase quickly once more, and now it is being powered up as a result of the vast oceans of liquidity that central banks have created over the last few decades, and which is now washing out into the real economy, rather than being penned in to the global asset markets to which it was diverted over that period. Supply can be expanded from its current level, because all of the additional new farms and production created across the globe after 2000, is generally more productive, for the reasons that Marx set out in Theories of Surplus Value, Chapter 9, that it has now had time to sink all of the costs of infrastructure provision, and fixed capital costs. But, the supply is not going to increase as fast as it did between 2000 and 2014, because much of the effect of the additional production, and productivity has already been obtained. Additional supply now, will require expanding the size of existing farms rather than opening up large amounts of additional land, and so on. It will involve greater accumulation of circulating capital, and more intensive methods requiring more fixed capital, and so on. As a result short run marginal costs will fall less, and may even rise.

What is more, not only will all of the excess liquidity cause money prices of agricultural commodities to rise, but all of the global inflation now being stocked will cause other input costs to rise. The costs of fertiliser, of agricultural machinery, of transport and so on, will rise, putting further upward pressure on costs. Workers facing higher prices for wage goods will need to be paid higher wages to cover living costs, but across the globe, labour shortages are already being seen causing firms to compete for available labour, which means having to pay higher wages, yet another increase in costs for producers. Britain again is suffering in that respect from Brexit, as it has huge shortages of labour for harvesting crops, labour that formerly came from seasonally employed EU workers, who now cannot be employed. It has led to many farms in Britain being unable to harvest all of their production, meaning yet a further curtailment of supply and increase in costs and final prices.

As Marx demonstrated, in Value, Price and Profit, against Weston, a rise in wages does not equate to a rise in prices, or inflation, because it does not mean a rise in the value of commodities. If wages rise, the concomitant is a fall in profits not a rise in prices. However, as Marx also shows in Capital III, under capitalism, commodities sell at prices of production, not exchange values. For each capital, or each sphere of production, the price of production is k + p, where k is the cost of production, or the cost of constant capital plus wages (c + v), and p is the average profit. So, if k rises, be it because of a rise in the prices of constant capital or a rise in wages, each industry will increase its prices accordingly, or else its profit would fall below the average. If profits fell below the average, then capital would leave this sector, or, in practice, accumulate more slowly than elsewhere, so that the reduced level of supply would cause prices to rise until the average profit was made.

In reality, as Marx describes, what happens is that firms increase their prices, where their costs increase, and it is only over a period of adjustment that capital is reallocated, and that where wages have risen in general, the result is a reduction of the average rate of profit, and modification of prices of production. Again, in practice, central banks facilitate this process by increasing liquidity to enable firms to increase prices so as to avoid sharp reductions in their profits and rate of profit. It is one way they claw back the increase in money wages paid to workers. So, on the one hand the current global inflation of food prices is a consequence of the excess liquidity that central banks have pumped into the system over the years, but the rise in costs that firms now face, creates the motivation for central banks to provide even more liquidity, so that those firms can recoup the additional costs in higher prices, rather than suffer a sudden squeeze on their profits.