First, that insight ushered the adjective 'malthusian' into the language; then it prompted ridicule when it became clear that the notion - apart from being slightly obnoxious - was false. The inexorable growth in the developed world's wealth surely meant that prosperity was not a zero-sum game, as Malthus had effectively argued, where one generation's misery results from the comparative affluence of the previous generation - an affluence that prompts them to behave irresponsibly (ie, breed too much).
Well, not so fast. Malthus' reputation may not be repaired, but today's predominant fear in financial markets - that high and rising inflation will damage growth - has its roots in Malthusian soil. That's because today's worries are directly or indirectly linked to food prices and population. Recall that the central point of Malthus' 'principle on population' is that the number of people rises geometrically while food supply only rises arithmetically. That much should be self-evident: more people will beget more people, yet the amount of grain produced in a year is barely affected by the amount produced the previous year. In other words, in the absence of marvellous increases in agricultural yields and substantial new tracts of land being brought into production, a rising population will always put pressure on food supply and hence food prices.
And this is especially true today as much of the so-called developing world is enthusiastically following the 'protein trail'. Diets in the fast-growing economies are becoming richer in protein, which is another way of saying that people are eating lots more meat and we all know that it takes lots more land to raise, say, a kilo of beef than a kilo of rice (roughly eight times as much). This is giving rise to the odd situation where there is shortage even in times of plenty; or maybe it's more accurate to say 'shortfall'. Thus the world's grain harvest in 2010-11 looks set to be the third largest on record at 1.73m tonnes, according to the International Grains Council, yet that will fall short of estimated global demand of 1.79m tonnes.
It is taken as a given that the consequence of pursuing the protein trail will be higher food prices as more grain production is devoted to stuffing into pigs and cattle. Yet, interestingly, two leading food economists reject this notion. In Reflections on the Global Food Crisis (International Food Policy Research Institute) Derek Headey and Shenggen Fan found "no link between the food crisis and the 'affluent diets' hypothesis". Both China and India are largely self-sufficient in food production so have little impact on market prices, they say; and, while China's demand for soya beans has grown substantially, the increase has been spread over the past 15 years. Intriguingly, they add: "In the past, increasingly affluent diets seemed to be associated with a decline in real prices (after all, US cereal prices have declined with only a few interruptions since the 19th century)." The authors acknowledge that what applied in the past may not apply in the future. Even so, they reckon that other factors are having - and will have - a bigger impact on food-price inflation.
Most obviously, there is the price of oil. The oil price has a big impact on input costs, both directly in energy costs and indirectly via the cost of animal feeds. More important, however, high oil prices stimulate demand for biofuel, a factor that has had a big impact on maize (ie, corn) prices. Sure, it's not all bad news - demand for maize means that global production in 2010-11 is estimated at 810m tonnes, 14 per cent higher than four years ago. Yet most of that increase is in US production, where something like a quarter of all maize grown is given over to ethanol production. As maize-based ethanol is subsidised by the US government at the rate of maybe $1.50 a gallon, the distortions to the markets for both fuel and corn are substantial. Nor is it pleasant to contemplate that, according to the World Bank, the grain needed to fill the tank of an SUV just once would feed a person for a year. Worst of all, Messrs Headey and Fan say that a growing number of studies show that biofuel production pushes up food prices while having virtually no impact on fuel prices.
The moral is that this is what happens when large amounts of political pork get mixed up in food - and energy - production. Politicians will manage to do what Malthusian forces could not - keep food prices high through the distortionary policies that keep food production far lower than its potential, especially in sub-Saharan Africa. That's a reason - albeit not a terribly palatable one - for keeping an investment weighting in soft commodities and agri funds. The Bearbull Global Fund already has its holding in the ETFX Global Agri Business exchange-traded fund and I may add to that in the coming months.
