Saturday, September 15, 2007

It's started

Not a day after we had warned of the prospect of real food shortages then up pops The Daily Telegraph to predict of a shortage of eggs in the run-up to Christmas.

Traditionally, eggs sales peak during this period but, with the rising cost of wheat (and other staples, such as soya) livestock feed costs have also soared and it is now becoming unprofitable to produce eggs. Thus, egg producers are cutting back on production and battening down the hatches.

Egg production is especially vulnerable to feed cost hikes, as sixty percent of producers' cost is feed. But the industry is also caught in the classic vice, where feed costs are price elastic – responding rapidly to increases in the price of raw materials – while food prices are relatively inelastic.

Supermarkets are highly adept at manipulating the market. As British producers attempt to increase prices, buyers look elsewhere in a truly international market and suck in local surpluses at bargain prices, wherever they might be found. By this mechanism, prices are sometimes held artificially low, in which event producers respond by cutting back production until the prices improve.

This may well happen this time. But, although the retail price of half a dozen eggs has risen above £1 last year - up 27 per cent in 12 months - it is still not enough and industry sources are saying that a 25 percent rise at the farm gate is needed.

Since the wheat shortage – driving feed increases – is global, the downstream shortage of eggs will drive up prices. There is always a time lag as production catches up, though – neither hatcheries nor pullet rearers can handle rapid changes in demand and it takes time to get birds into lay - so local shortages are indeed a possibility.

In its piece, The Telegraph blames "a combination of changing diets around the world, especially in China, disastrous harvests and competition for crops from the biofuel industry" for the wheat price-hike. But there is more to it than that.

Traditionally, governments have always kept buffer stocks of key grains – not least as part of the strategic food reserve to keep people fed in times of emergency. But stocks were also used as a management tool, with amounts released (or taken into to store) to take the edge off extreme price fluctuations, which tend to damage the market.

This function was handed over to the EEC when we joined the Common Market in 1972 and has remained an exclusive competence of the EEC/EC/EU ever since. And it is the commission's disastrous management of these stocks that have been partly responsible for the volatility of feed prices which egg producers are finding it so difficult to deal with – that and the drive by the EU to promote biofuels.

It turns out that the guardians of the CAP are no better at managing shortages than they were at handling surpluses, which means that agriculture and the food market is in for a rough time. With so few specialist farming correspondents in the media though, few journalists will understand what is going on. We will thus have another situation where the EU messes up and no one is told.

Nevertheless, if Ming Campbell wants an honest debate about our membership of the EU, he should ensure that its role in the (mis)management of our food supply is brought to the fore.

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