[보도] Agflation Fear Looms Over World

Food prices have risen sharply, sending many people into a near-panic, as food is essential to sustenance and the price hikes are notably prominent in everyday items, such as noodles. The phenomenon is described as 'agflation,' a combination of the worlds "agriculture" and ''inflation.''

Record high levels in food prices are directly driven by a surge in wheat prices on the international grain market. According to the United Nations Food and Agriculture Organization (FAO), wheat prices soared more than 80 percent from a year ago and corn prices jumped about 25 percent. The international grain stock ratio has dipped to its lowest since 1982, making the future outlook much more bleak.

There are many driving factors behind the grain price hikes, including a reduction in output due to bad weather and climate changes. But the direct hit comes from industrial countries' pricey and selfish experiment to turn grain into ethanol, a source of fuel. In the United States, about 14 percent of corn output was used for ethanol production. Forecasts are that the proportion will reach 30 percent by 2010. Furthermore, the lion's share of the production cost for grains comes from petroleum products such as fertilizers, fuel for agricultural machinery and electricity.

Reasons Behind Price Hikes

This shows that the agflation is directly connected with record-breaking oil prices and that it is in line with the general pattern of price hikes in raw materials. Geopolitical factors have contributed to the higher prices but more fundamentally fast economic growth in major developing countries is a key driver. In particular, it's well-known that fast growing demand in China is a decisive factor.

The experiences in many countries and the development of economic theories have produced a prevailing consensus on the path to economic growth. Many people are now well aware of the fact that if property rights are protected through the rule of law and free market, then any economy can grow at a fast pace. Such a realization has brought faster economic growth to more and more countries.

Consequently, demand for raw materials will continue to rise, which in turn invariably leads to price hikes, with explorable reserves of raw materials essentially limited.

Economic growth is the outcome of people's economic activities. When all people pursue better lives, the economy continues to grow and individual income increases. A corollary is that individuals consume more raw material and energy. Useable raw materials and energy are finite and increased consumption usually tends to push prices higher. The only solution is a reduction in population.

Unfortunately, reducing the population is not feasible. People's desire to procreate is so strong that it's almost impossible to implement effective population control. The difficulty is further compounded by growing worries about an aging society and the nationalist belief that the state's power hinges on the size of its population. Therefore, the fundamental solution to "agflation," or agriculture-based inflation, is impracticable.

Limitations of Grain Shock

On the other hand, there are counteractive factors that ease the supply shortage of raw materials and energy. First, the price mechanism of the market works as an automatic equalizer. A rise in raw material prices brings about an economic recession, which in turns lowers prices by putting pressure on the demand for them. When prices rise, the market mechanism works in the opposite direction.

Second, the market will prompt a supply increase by responding to the new conditions. When prices of raw materials stay high, it will trigger an increase in supply. Mines and lands that have been commercially non-viable will start production and a variety of substitutes will be developed. Producers will stop existing processing technology and develop a more economical method.

Third, as developing economies like China, India, Brazil and Russia grow further to near-maturity, their GDP growth rates will slow down gradually. Consequently, their impact on the raw materials market will eventually decrease.

Fourth, there will be a constant inflow of technology that will consume less raw material and energy. Such a development will benefit most developing countries, which are now heavily dependent on inefficient technology.

The production of ethanol using grains that have caused agflation will exert less influence over time. The news that ethanol can be made out of grain has attracted great attention but the prospect is not so bright. Corn-ethanol has far higher production cost than oil and its quality is even inferior to ethanol made out of sugar cane. Grain-ethanol has become commercially viable thanks to exorbitant oil prices and heavy government subsidies. Even if a great proportion of grain harvest is put into the production of ethanol, it can meet only a small amount of the fuel demand.

Another weakness is that grain-ethanol needs a large quantity of water. Water is so scarce in the grain fields of the mid-west regions in the U.S. that farmers there are highly reliant on underground water sources. Against this backdrop, the production of ethanol using grains has serious limitations. New technologies using less water may be available sooner or later but it will be difficult to completely overcome the weakness.

Collapse of Global Economy

As such, in the foreseeable future, the world will likely suffer difficulty due to the shortage of raw materials and their soaring prices. But this will not lead to the collapse of the global economy. Grain will be no exception. The days when food prices are cheap enough to make obesity a worldwide problem may be gone. Meat consumption may be put under control for the sake of efficient use of grains. But starvation would not prevail throughout the globe all of a sudden.

Therefore, it's unrealistic to worry about a situation where we can't buy food even though we have money. A policy based on the intrinsic fear of a possible food shortage is not useful at all, but harmful. The most protectionist industry in any society is agriculture. This is more particular in Korea, where agricultural prices are many times higher than in the global market. Therefore, it's urgent to lower trade barriers in the agricultural sector and grain shocks should not be used as justification to frustrate liberalization trends.

In the long run, those worries are groundless. As long as the sun is shining, human civilizations will not suffer due to a lack of resources. Most of the energy used in the earth comes from the sun. All food comes from plants' photosynthesis. Oil or natural gas is fossil fuel that comes into existence because of the sun. Both the hydraulic power and wind are a transformation of solar energy.

The technology that transforms the sun directly into electricity will be available sooner or later. In no distant future, food will be produced through artificial photosynthesis. Many mineral resources may be more costly to dig out but they are not entirely unavailable. Synthetic substitutes such as ceramics will be developed. What science-fiction movies envisage may become a reality, with the earth pulling small asteroids into its orbit to exploit water and minerals from them.

As British physicist Dennis Gabor points out, there has been no civilization in human history that collapsed due to lack of resources. The possibility will be much lower in the future. The incorrect prophecies of Malthus and his followers support such optimism.

This article appears on the Web site of the Center for Free Enterprise.