Andreas Whittam Smith: Are we entering the era of agflation?

Agricultural prices have begun a strong advance after years in the doldrums
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The Independent Online

We are going to have to get used to a nasty new word - agflation. Agflation means rising food prices. Already food costs are rising at 6 per cent per annum, twice as fast as the cost of living. And judging by the behaviour of commodity prices, there is worse to come.

To see what is going on, however, is not easy. You have to study obscure sections of the financial pages where movements in the prices of wheat, maize, barley, soyabean, cocoa and sugar and so are given just one line each. It is impossible to find any wholesale milk prices even though dairy farming is Britain's most important agricultural activity.

Moreover if share prices had done what wheat prices did last Thursday, when they reached their highest level for 10 years, it would have been big news. But because we are not yet sensitised to agflation, this climb was watched only by professionals with a need to know.

If agricultural prices have begun a strong advance after years in the doldrums, it will be something to note in the history books. For food trends tend to be deep set and don't often change direction. In the 18th century an era of cheap food lasted from the 1730s until the late 1760s. Then came dear food, particularly during the era of the Napoleonic wars. There were numerous food riots.

This period lasted until the 1840s, a decade known as the "Hungry Forties". But finally, under the impetus of free trade, cheap transport across the oceans and rising agricultural productivity there began a long decline in food prices, which may only now, apart from brief interruptions, be coming to an end.

If this is so, one of the reasons will be something that our ancestors would have recognised - more mouths to feed. Except that the increased demand is coming not from the peoples of Europe or North America but from the giant emerging economies of India and China.

Their rising populations are demanding not just what their parents consumed but a higher protein diet. Thus India has become a net importer of wheat for the first time since 1975. And China is expected to become a net importer of corn by late 2008.

There is also a second development driving prices that isn't going to go away any time soon - using food crops as a source of energy in place of oil, gas and coal, in other words, supplying the so-called biofuel industry. Actually you can obtain energy from any plant or tree, but the most effective sources have proved to be maize, soya beans, oil palms, sugar cane and sunflower.

Last year, one-third of the entire US maize crop was used to provide bioethanol, a substitute for petrol in road transport vehicles. The UK, too, has bioethanol plants coming on stream. Morrisons supermarkets currently sells the product to motorists for 2 pence per litre less than unleaded petrol.

In Britain, agflation has been most visible in the price of cereals, with the average price rising by 12 per cent in 2006. Likewise the prices of fresh vegetables were 8.8 per cent higher and potato prices leapt by 30 per cent. Livestock prices were marginally higher.

By the way, these trends imply, quite unexpectedly, that the recent reform of the Common Agricultural Policy was a mistake. The old scheme supported prices and led to over supply which European governments removed from the market place and stored. Today these surpluses could have been liquidated at higher prices, dampening agflation and yielding a profit for European taxpayers. Instead agricultural support now comprises a single farm payment that is paid regardless of what happens to prices. Soon farmers will be receiving subsidies when they don't need them.

But the big exception to rising prices remains milk. It is worth looking at this carefully because it is a good test of the agflation thesis. The thing you notice is the sharp contrast between what a food giant like Nestlé is saying - "the global cost of milk is rising so fast that it is impossible to raise shelf prices fast enough to match " - and what British farmers find, persistent low prices.

The difference is that the liquid milk market, from farm to wholesaler to doorstep or supermarket shelf, the whole transaction confined within a limited time scale, is very different from the bulk market in such products as skimmed milk powder, an internationally traded commodity whose price has doubled during the past year.

But in due course, logic will prevail. The higher prices will draw supplies so that local markets will follow the direction in which the bulk market goes. Indeed I think one could say that if the cost of the pint on the doorstep begins to rise markedly, then we have definitely got agflation.