Prof John Freebairn's talk from the Australian Agricultural & Resource Economics Society's event "Reframing the Food Agenda: Setting the Scene for Australia" held August 19, 2011

1. First Principles Approach to
Food Security
John Freebairn
University of Melbourne
AARES, Adelaide, 19 August 2011

2. Food Security
• What is food security?
– Largely about the availability and affordability of food
(FAO)
– Also, can include food safety, nutrition, variety, and
quality of eating experiences
– Recent experience as base case
• Largely boils down to price and quantity
– Aggregate
– Distribution, or expenditure relative to income
• Much of the story can be seen in terms of the
demand for and supply of food

3. Supply and Demand for Food to
Explain and Forecast Food P and
Q
• Models of
– Global supply and demand
– Australian supply, demand and trade
• Primarily focus on trend and short term
factors shifting supply and demand to
– Explain trends and fluctuations in P, Q and
food expenditure as share of income over last
70 years
– Framework for forecasting and policy analysis
for the future decades

4. General Model Framework
• Food demand
Qd = f(Pr, Pop, Y, Policies, ….)
• Food production
Qs = f(Pf, Land, Climate, Var. Input Costs,
Technology, Policies, ….)
• Food balance
Stocks(+1) = Stocks + Qs – Qd – wastage
• Farm and food price links
Pr = Pf + f(Var. Input Costs, Technology, Tastes)

5. Food Demand
Qd = f(Pr, Pop, Y, Policies, ….)
• Price (Pr): close to unity elasticity for the poor
and falling with income
• Population: unity elasticity
• Income (Y): less than unity elasticity, but with
shift to higher proteins, variety and quality, an
important shifter due to economic growth
• Policies: in recent years extensive subsidies for
conversion of food into biofuels

6. Food Supply
Qs = f(Pf, Land, Climate, Var. Input Costs, Technology,
Policies, ….)
Stocks(+1) = Stocks + Qs – Qd – wastage
• Largely a competitive industry
• Price (Pf): low elasticity in short run for production, but
cushioned by changes in stocks
• Land and other natural resources: limited supply and
competing with environment
• Variable inputs: agriculture has to compete against the
rest of economy, including rising labour cost
• Technology: key driver of supply; genetics, machinery
• Policies: on input and output markets, environment
• Wastage: substantial in both developed and developing
countries, but for different reasons (10-40% of Qs)

7. Prices and Food Supply Chain
Pr = Pf + f(Var. Input Costs, Technology, Tastes)
• Off-farm transport, processing, distribution, etc is highly
competitive. Use general economy labour and capital
inputs and farm product
• Farm or producer price, Pf, is a small share of the retail
or consumer price, Pr.
• Off-farm value-added to food has a high income
elasticity
• Pr is more stable than Pf. Associated with
– More stable priced of-farm inputs
– Agribusiness, wholesalers, retailers, etc practice price averaging
and smoothing

8. Global P and Q Outcomes
S1
Real food
price
P1
D1
Q1
Food production per year

9. Global Trends over Last Century
• Food supply has shifted out faster than food
demand with a trend fall in terms of trade (RBA,
Bulletin, June 2011).
• Food share of total expenditure falling in most
countries. Key role of growth of Y.
• But, over one billion people are hungry today
• Short term price spikes around early 1950s,
early 1970s, 2008 and now. Associated with low
levels of global stocks (Wright, 2011)

10. Global P and Q Outcomes Over
Time
S1
Real food
price S2
P1
P2
D1 D2
Q1 Q2
Food production per year

11. Australian Production,
Consumption and Trade
Da
Price of
Aust. Food Sa
P D = Da + Drow
Qd Qp
Australian consumption, production and trade
per year

12. Australian Story
• To a large extent a small country trader with
both food imports and exports, but a net exporter
• Strong productivity growth on- and off-farm
• Our food prices largely reflect world commodity
prices
• Importance of off-farm marketing inputs means
stable retail prices
• For most Australians, food expenditure less than
20% of total expenditure. But, fringe group at
risk of poor nutrition. Growing obesity problem.

13. The Future
• Will the experience of the 20th century
repeat
– Downtrend in relative food prices with
technology beating population and income
shifts
– And with occasional self-correcting price
spikes?
• Consider likely shifts in demand and
supply

14. Demand Shifts
• Population growth from current 7 billion to
9.3 billion by 2050, and then level off (UN)
• Higher incomes, including shift to higher
protein food products
Together, FAO estimates a 70% increase
in demand by 2050
• Will policies to subsidise food conversion
to biofuels and fibres increase or
decrease?

15. Can Supply Shifts Match the
Demand Growth?
• Land: not a lot more, and competition with
environmental and urban (minerals?) uses
• Water: as above, but big technology
opportunities
• Weather: climate change and adaptation
• Technology: GMO; catch up to best practice
• Wastage reduction
• Key role for policy
Productivity growth the big player

16. Key Roles for Policy to Encourage
Productivity Growth in Food
– Best use of resources, including land and
water
– Alternative uses of natural resources
– Funding of and adoption of new technology
– Open global competition and flexible markets
– Clarification and simplification of regulations
(Productivity Commission)
– Redistribution by appropriate instruments
– Obesity