A new report suggests that a clandestine cartel of fertilizer companies drove food prices so high that they precipitated a crisis that drove 44 million people into poverty.
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Did a clandestine cartel of fertilizer companies drive food prices so high that directly or indirectly drove 44 million people into poverty?
That's the chief question both Hinnerk Gnutzmann and Piotr Spiewanowski, a pair of economic researchers from Germany and Poland, set out to answer in a report recently published by the duo. The paper, while certainly divisive among economists and agribusiness experts, certainly seems to suggest so.
Prior to the financial crash in 2008, a global food crisis had driven up food prices, including the prices of staple grains like corn, rice, and wheat, which increased to 2.8 times higher in 2008 than they were in 2000. But public focus on the critical issue was largely averted. As a 2011 UN report stated, focus on the "fragile and unsustainable global food security situation" and "concerns about how higher food prices were adversely affecting low-income consumers and efforts to reduce poverty as well and the political and social stability of poor countries and food-importing countries" was lost amidst worries over the stock market crash in 2008.
As Gnutzmann, one of the researchers, explained to MUNCHIES, "The food crisis has been most deeply felt in developing countries, where households spend a large share of their income on food and local prices follow commodity prices much more closely than in rich economies."
No one had been able to sufficiently explain the roots of this crisis in food prices—until, perhaps, now.
In the newly published report, which was funded by both Germany and Poland's national science foundations, the researchers have drawn this conclusion: Food commodity prices are affected by fertilizer cost to a much greater degree than anyone ever thought.
It was previously believed that high oil prices led to high food prices; but when oil prices came down, food prices didn't. Instead, the report says, "Fertilizer has a cost share of 44 percent in food commodity prices." This means fertilizer costs affect food prices much more than oil prices do—contrary to most economists' beliefs.
Bottom line, say the researchers: We're all basically at the mercy of the fertilizer cartels, and their economic influence on what we eat—and if we can afford to eat at all—is enormous. As Gnutzmann explained to us, "Fertilizer has allowed world food production to grow even more rapidly than population in the past decade. But this has also made agricultural markets dependent on a steady and cheap supply of fertilizer."
What's more, it's a shadowy group of fertilizer corporations that may be behind the rising food prices. The researchers say that that a tripling of fertilizer prices by an international cartel likely led to the escalation in long-run food prices that drove millions into poverty.
Who are the companies behind these cartels? According to Quartz, the largest in the field include Potashcorp of Canada, Mosaic from the US, Uralkali from Russia, and Belaruskali of Belarus. The companies are alleged to have cooperated with each other, agreeing on prices and raising them together when they could. A recent intervention by the Chinese government in the negotiation of prices for the mineral potash seems to prove that when the Russian and Belarusian potash companies were not working together, prices came down.
Some experts in the economics of food prices are not quite convinced that all roads lead to fertilizer prices. MUNCHIES reached out to Jayson Lusk, the Regents Professor and Willard Sparks Endowed Chair in the Department of Agricultural Economics at Oklahoma State University, who said, "Fertilizer prices are important, but they're mainly affected (on the supply side) by the price of oil." He points out that food prices are now coming down and that two key contributors to the 2008 through 2012 price spikes, at least in the US, were drought and ethanol prices. "These led to high demand for farmland and farm inputs (which will pull up fertilizer prices due to an increase in demand). In this latter case, it is higher commodity prices driving increases in fertilizer prices, not the other way around."
Kathy Mathers, the Vice President for Public Affairs of the Fertilizer Institute (yup, there's such a thing), agrees that matters may be more complicated. She told MUNCHIES, that in part, "Fertilizer is a commodity and its price is determined by global supply and demand, not the cost of production. The 2008 run up in fertilizer prices was driven by demand for fertilizer which outpaced the supply." She says that in 2008, the Federal Trade Commission issued a letter to Senator Byron Dorgan of North Dakota, whose constituents were concerned about fertilizer prices, summarizing a report to that effect.
Likewise, David R. Just, the co-director of the Cornell Center for Behavioral Economics in Child Nutrition Programs at Cornell University, told us, "I am skeptical of this result. Though fertilizer probably has a substantive impact on food costs, their estimate seems to be much higher than reasonable. Moreover, their methods make me wonder if they are not picking up on some correlation with common factors that was unaccounted for. The outsized result seems to suggest there may be a problem with their statistical analysis."
In any event, there are recent signs that competition between the fertilizer firms has increased and food prices are coming down. That won't do much for the millions who have already suffered the consequences of the food crisis. Perhaps, now that we know that food prices may in fact be tightly connected with fertilizer prices, attention will be paid and prices will continue to decline.