Paul Krugman links rising food prices to climate change. “But the evidence does, in fact, suggest that what we’re getting now is a first taste of the disruption, economic and political, that we’ll face in a warming world. And given our failure to act on greenhouse gases, there will be much more, and much worse, to come.” He could be right. How does a free market respond to the growing realization that agricultural yields could be more volatile (great output, low output) over time? Capitalism provides a number of adaptation strategies. We can hold inventories. We can buy futures contracts. In areas where there are not great alternative uses for land, farmers can grow crops hoping that the price will be high when they harvest. Paul Krugman should not forget the power of international trade to protect us! Global agricultural trade (with low tariffs and quotas) is the best way to adapt to this anticipated volatility. If Russia has a great harvest, it can export to Egypt at the world price. Assuming that climate change has different agricultural impacts in different geographical areas, this offers diversification of our food portfolio.
Dr. Krugman forgets that there are two sides to a market. We worry about rural poverty. Which farmers are making good $ selling now that prices are high? He is correct that the urban poor are hurt by this price spike. But, this raises a basic nutrition question. If the price of wheat, corn, sugar and oils all soar, what can a household substitute to?
UPDATE: An economist who actually conducts research on international trade in agricultural products contacted me. Here is his post.