Why international grain prices have fallen back to levels last seen 6 years ago

Without notice, international grain prices have returned to the low point seen during the 2008 financial crisis. The prices of wheat, corn, rice and soybeans have all fallen by more than 50% from the highs they rebounded to after the crisis. Although the drop in rice prices was less than 50%, because the rebound high during the crisis was not high enough, the current absolute price level is in fact substantially lower than the lowest level during the crisis. Take Thai rice (5% broken) as an example: before the crisis the price peaked at more than 1,000 US dollars per tonne, during the crisis it fell to a low of 470 US dollars per tonne, and after the crisis it rebounded to a high of 620 US dollars per tonne, but it has now fallen to 375 US dollars per tonne (August data), which is 20% lower than the low during the crisis.

The global economy is still sluggish, but the total economic output of the major economies has already surpassed its pre-crisis peak. Compared with 2008, US GDP expanded by 7.5% in 2014, China's GDP expanded by 80% in 2014, Japan's GDP expanded by 1.6% in 2014, and the EU's GDP was basically flat in 2014. Economic activity is still expanding, so why are grain prices falling? Many people think that "man is iron, rice is steel, and you will be hungry if you miss a meal." Never mind that the economy is still growing; even if the economy declines, you still have to eat, and with "rigid demand" in place, grain prices should by rights be the most firm. So why have they instead fallen so sharply?

People who hold this logic equate the demand for grain with the demand for eating, but clearly the two are not the same thing. Much of the grain produced is not eaten by people, but eaten by machines (industrial demand), or eaten by livestock (feed demand), and these demands are clearly not rigid.

Some might say that feed demand is indirect demand, ultimately serving people's demand for meat, poultry, eggs and milk, so it can still be counted as "eating" demand. This is actually a bit of a stretch. If the demand for meat, poultry, eggs and milk is also counted as eating demand, then eating demand is not so "rigid" after all. That is because not eating meat, poultry, eggs and milk, or reducing demand for them, does not do much harm to the human body. Indians to this day consume very little meat, and this has not prevented their nation from reproducing to this day and becoming ever more prosperous. The fact that many Indians are vegetarian is certainly due in part to cultural customs and habits, but low income is the fundamental reason. The far higher meat intake of India's upper classes and of Indians who have emigrated to Europe and the United States is typical proof. The large increase in Chinese people's demand for meat is also only a matter of more than ten years. Before reform and opening up, it was very common for ordinary families to go a whole year without tasting meat. This too is a huge difference in diet that emerged after income changed. If a demand is greatly affected by changes in income, we say that this demand is very elastic, and it cannot be called rigid demand.

So, setting aside meat demand, is the true demand for eating then unaffected by income and truly rigid? With a little thought, it is actually not that way at all, because the belt can always be tightened a notch, people do not necessarily have to eat three meals every day, and money can always be squeezed out from between the teeth. This means that when a person is in a state of extreme poverty, he can compress his own food consumption; once a certain income level is reached, food consumption will remain stable, and he will not adjust his food consumption because income rises or falls. So, once this income level is reached, does that mean the demand for eating has reached rigid demand? Still no. That is because although the amount eaten may not change, the content of the meal will change. It is still half a jin of rice every day, but previously it was rice costing 3 yuan per jin, and now that income has risen, it has been switched to rice costing 10 yuan per jin. Total rice consumption has not changed, but as income changes, the proportion of different varieties consumed within it has changed.

When the economy is sluggish and income growth is slow, demand for high-end rice will decline faster than for mid- and low-end rice, which means a decline in the overall consumption price of rice (the result of demand shifting from high-end to mid- and low-end). In terms of quantity, rice consumption has not been affected by income, but the structure of demand has been affected, and therefore the price has also been affected. At the macro level, we then see rice prices falling because the economy is doing poorly, and this decline is not because people have reduced their rice consumption, but because they have changed the structure of their rice consumption. This is something that people who ask, "If the economy is doing poorly, does that mean we stop eating?" cannot understand. For many problems, it is difficult to reach correct conclusions without digging down and paying attention to details.

In addition to food demand, industrial demand and feed demand, in fact a considerable portion of grain is wasted, and this wasted and discarded grain was also purchased with consumers' money, so it is still counted as grain demand in the statistics. This "waste" demand is closely tied to income level. Overall, the higher people's income level, the more common the phenomenon of food waste. In the past, even a grain of rice that fell on the table would be picked up and eaten; now, large amounts of uneaten fish and meat are thrown straight into the trash bin. According to 2012 data from the UN Food and Agriculture Organization, 1.3 billion tonnes of food are wasted worldwide every year, most of it from the developed countries of Europe and North America. If one quarter of this food were saved, it would be enough to feed the world's roughly 900 million hungry people.

Wasting food is of course morally condemnable, but since the waster has paid the money, "wasting" itself is also one of his rights in disposing of the food he has purchased. There is no law saying that a person must finish all the food he buys. The reason food waste is concentrated in Europe and the United States is not that Europeans and Americans are born to love waste, but that Europeans and Americans have high income levels, food is relatively cheap, and people can afford to waste. This means that the "waste" demand for grain is very elastic. When the economy declines and people's incomes fall, food waste will first decrease, which means a decline in grain demand, and with other conditions unchanged, grain prices will fall.

I have rambled on at such length above in order to explain one principle, namely that grain demand is not rigid. Like many ordinary goods, grain demand is greatly affected by income. Next time someone asks, "If the economy is doing poorly, does that mean we stop eating?" you can explain the above reasoning to them. However, this still cannot resolve the question raised at the beginning of this article: total economic output is expanding, so why are grain prices instead worse than 6 years ago? Expansion of total economic output means that the level of social income is higher than 6 years ago. According to the logic above, grain demand is also higher than 6 years ago, so why have prices instead come down?

Actually, it is very simple: over the past 6 years grain demand has risen, but grain supply has also risen, and it has risen even faster than demand. According to data from the US Department of Agriculture, from 2008 to 2014, the 2014 output of the world's four major grain crops (corn, rice, wheat and soybeans) was 1.18 times that of 2008. Over the 6 years, cumulative total output was 16.1 billion tonnes and cumulative consumption was 15.8 billion tonnes, so production was still greater than demand.