Climate change and the cost of food

You're not imagining it: things are getting more expensive. What the research says and what we can do

There’s so much to say on food innovation as a subset of climate innovation, but today we’re going to tackle food and climate from a different angle: cost.

Climate change will raise prices — and poverty

New work from researchers at the Potsdam Institute for Climate Impact Research and the European Central Bank is projecting that climate change will drive up food prices around the world by up to 3.2% per year by 2035. 

Look at those confidence intervals though… Source: Global warming and heat extremes to enhance inflationary pressures, Maximilian Kotz, Friderike Kuik, Eliza Lis & Christiane Nickel

Food will grow to take up a greater proportion of total household income because these price increases will outstrip overall climate-driven inflation. The impact will be disproportionately borne by people in sub-Saharan Africa, where many communities are already living with moderate to severe food insecurity.  

It’s a buzzword we’ve heard a lot in the news lately, but here it’s worth exploring inflation as a systems problem for a moment. When the rate of inflation — measured against time — is high, that means greater price increases are happening over less time. Fast inflation exacerbates and even creates net-new poverty as wages aren’t able to keep pace with the price of basic goods and services. This is especially painful when it comes to food, a good that people can’t opt out of. 

Spending more on things you can’t avoid is equivalent to earning or keeping less, so inflation erodes household wealth and conversely drives household poverty. While most of us understand this basic principle, the scale of the numbers may surprise you.

Estimates by the United Nations found that an additional 71 million people around the world fell into poverty between 2021 and 2022 due to rapid inflation on essential goods and services, triggered by the Russian invasion of Ukraine and its knock-on effects on global food and energy systems. 

The price of food already increases by a small amount every year. The 20 year historical level of retail food price inflation is 2.5% each year, and correlates closely with field crop prices.

While not as volatile as energy or fuel, food prices also tend to correlate with those other building blocks of modern society.

The food tax that climate change is projected to impose would be on top of natural inflation. If we take US numbers as an example, that would bring year over year inflation to 5.7%. 

For sizing, between 2021 and 2022, when the Russian invasion caused massive global spikes in prices, food-at-home prices rose by 11.4%. 11.4% is a number high enough that almost everyone noticed the change, and it took an international war to get us there. 

The inflation that the Potsdam and European Central Bank researchers are highlighting will be less exceptional and more relentless.

The researchers used 27,000 data points to project climate inflation

The researchers combined measures of national exposure to different weather conditions, based on high-resolution data from the European Centre for Medium-range Weather Forecast. Their dataset included monthly price indices for different aggregates of goods and services across 121 countries spanning different levels of economic development over a 25 year period from 1996-2021. They then applied fixed-effects regressions to these over 27,000 observations of monthly consumer price indices to quantify the impacts of climate conditions on inflation to come up with a predictive baseline  for understanding the causal relationships between weather conditions and severity and prices for goods.

They found that the strongest single factor affecting food prices was increasing temperature. The researchers also found that price response to average temperature is strongly non-linear, so it’s not just average temperatures but also greater heat extremes that will drive food price inflation.

While we may not be able to predict the exact timing of the next 1000 year flood or when the world will see its first Category 6 hurricane off the Saffir-Simpson hurricane scale, we do have vastly greater certainty, predictability and evidence around our long horrible march to a hotter world. 

Doing the math on 3.2%

If you’re spending $5 on a food item, then is it really going to break the bank to spend $0.29 more on that item next year? (Note: $0.29 is 3.2% plus 2.5% as a baseline annual inflation rate on food)

Let’s do the math.

The average American household spent around $1000 on food per month, not accounting for variations in household size, geography, income or other factors.

A 5.7% increase on $12,000 a year is $684 more. A 5.7% increase over that in the subsequent year would be $723 more. In the third year, it would be $764 more. 

Over a span of three years, we’ve now paid $2171 more for food. When over 55% of American adults can’t cover an emergency expense of $1000 or more out of their savings, this extra cost line would put significant strain on many people, even if it’s just $0.29 at a time.

Percentages are one thing, but the absolute numbers will shock you. In the US, 17 million US households representing an estimated 43 million individual people were food insecure in the US in the last year — and 13 million of these people are kids. The USDA specifically defines food insecure as having difficulty providing enough food for all household members due to a lack of resources, so we know that money is at the bottom of this.  

This is heartbreaking and unfair, and it gets worse. While those of us privileged enough to live in rich countries like the US should all be deeply thankful for things like free and reduced school lunch programs, especially as they strive to serve more planet-friendly foods, we should also recognize that at scale, even these programs will become strained by the unabated price pressure brought on by climate change. 

An economic time bomb for consumers and producers

If we venture further to countries in sub Saharan Africa where climate change is already having more severe effects than in high latitude places in the global north, a 3.2% annual increase in food prices on top of built-in inflation is devastating because so many are already living with moderate to severe food insecurity. 

For example, 100% of surveyed members of one rural community in Ghana had experienced food insecurity in the past 12 months, with 26% experiencing severe food insecurity – or not having anything to eat for one entire day – on a regular basis. While slightly worse than Ghana’s national average, perhaps due to the more remote location of this particular community, these numbers were found to be similar to food insecurity rates in Ghana’s neighboring countries of Benin, Togo and Burkina Faso. 

It’s not just consumers who are affected by food price instability, either. Other work by the Center for Global Development has shown that if warming exceeds 2 degrees C, Africa’s crop production would decline by 18% by 2050 and crop revenue would drop by 30%. This not only affects food supply and prices for consumers, but also decimates producers’ livelihood. Given that 43% of Africa’s working class is employed in the agricultural sector, with many already living in poverty, this is a major economic time bomb.  

How exactly do rising temperatures affect food production? The specific mechanisms tell us a lot about what and who will be most affected. 

• For tree fruits and nuts — higher winter temperatures and warmer, earlier springtimes can disrupt chill accumulation, which stimulates flowering and fruit production. This leads to lower yields, poor fruit quality or slower growth. Higher temperatures, alongside toxins and pesticides which farmers may rely on more as yields decline, also hurt the wild pollinators that play a crucial role in production. 

• For staple crops like corn and wheat — heat stress, water stress and a shifted growing season all negatively impact core processes like respiration and water uptake and even photosynthesis, which gets disrupted by high temperatures. All of this affects yield and quality. 

Side note: extreme heat and changing rainfall patterns are projected to cut corn yields in Iowa by 5% overall, with some counties seeing declines of 10% or more. In Minnesota, soybeans will be down by 5% on average, but greater than 10% in some counties. In Kansas, wheat will be down by 5%. 

Both wheat but especially corn are critical input crops to other parts of the food and energy system. We talked about biofuels in our previous post on DAC prices and pipelines, but the number one use case for corn produced in the US is animal feed. That means these prices are upstream of costs for many other types of foods — everything from meat to milk to ultra processed products based on wheat and high fructose corn syrup (which, combined with dextrose, makes up the 3rd largest use case for US grown corn!).

• And we haven’t even talked about chocolate. As climate change hits West Africa, the price of cocoa futures has now surpassed the price of copper for the first time ever. 

West Africa, which produces most of the world’s cacao, has been hard hit by high temperatures, drought, wildfires, and a crop blight known as swollen shoot virus. All of these conditions exacerbate all of the other conditions in yet another negative feedback loop of climate change and together exert downward supply pressure on cocoa as a commodity.

And this is where climate money comes in.

With cacao and everything else, climate and money are deeply interlinked

Ghana uses foreign financing in the form of large loans to pay cacao farmers for their beans, and these loans are collateralized by bean supply. The capital from these loans provides upfront cashflow that farmers use to buy fertilizer, seedlings and other essential supplies for next year’s crop. 

With total cacao output for the 2023-2024 growing season coming in at half of the country’s initial forecast, the country now doesn’t have enough bean supply to secure a $200M drawdown from the financing facility. 

With insufficient collateral, Ghana faces either the option of defaulting on its loan or having to purchase cocoa on the open market now at prices that are more than double what they were when they secured the loans, in order to meet its collateral obligations. 

If we take a systems thinking approach, we see how climate change creates a series of overlapping negative feedback loops whereby extreme heat, drought and wildfires worsen each other and cut into cacao supply, and as that supply drops, there’s less cash to finance more supply, which worsens the cash situation. 

And this is to say nothing of the effects on international markets, where chocolate makers like Mars are making smaller bars with less chocolate, launching new flavors that use less chocolate or don’t use it at all, and warning of higher prices for Easter candy. 

What’s on the menu at the last supper

Sam Kass, who’s a former White House chef and political adviser to President Barack Obama, hosts climate change dinners where menus showcase the foods we can expect to lose or just pay way more for, including: 

• Salmon — because warming waters mean they’ll have to change migration patterns which will affect availability and cost

• Oysters and mussels — because of overharvesting and ocean pollution

• Almonds — because like we mentioned earlier, tree crops need chill accumulation, and excessive heat also brings both drought and destructive insects

• Lamb — because land animals that feed on commodity crops like wheat, corn and soy are about to get much more expensive as those inputs suffer from the effects of climate change

• Coffee — because coffee plants need cool nighttime temperatures. With 2 degrees of warming, about half of the world’s current coffee growing regions would no longer be suitable 

• Wine — for the same reason. The world’s wine growing regions are getting too hot for wine, yet just hot enough for wildfire.

• And of course chocolate —  climate change is on track to completely eliminate cacao tree production by 2050 if we don’t bend the curve.

We’ll end today’s essay with a different story that offers some hope. 

Cutting food waste to cut prices

While there are a lot of ways that climate change is going to affect food, big players are adjusting in interesting ways.

Google, which operates 386 cafes for employees around the world, is aiming to cut food waste from its cafeterias by 50% per employee and send zero food waste to landfills by next year.

While waste diversion is great because it reduces methane, Google’s data-driven measures to reduce waste in the first place are even more interesting. One change was to implement made-to-order scrambled eggs, which as a practice has cut scrambled egg waste by almost 50%. 

Google’s food operation is huge. It serves more than 240,000 meals a day and has more cafeteria locations than there are Cheesecake Factories globally. Google also runs more than 1,500 microkitchens and 49 food trucks. In other words, in addition to being a tech company, a real estate company and an energy company, it’s also a restaurant company, and it’s tackling climate change from within each of these business units. 

Side note: the Cheesecake Factory is one of the top 50 highest grossing restaurant brands in the world, and did $3.5 billion in revenue last year. Despite its extensive menu, it’s known for its industry-leading low food waste numbers achieved through precision demand forecasting and bulk supply measures.

Food waste is responsible for about 8% of all human-caused greenhouse gases and costs the global economy $1 trillion a year across 1 billion wasted meals. While its direct climate impact comes from the methane emissions it generates when it’s commonly landfilled, a systems approach shows us that it’s a lot bigger than direct emissions alone. 

Produced food that gets wasted represents an enormous loss of the water, land, energy, and labor that went into its production. Virtual water, or the water that’s embodied in the products we grow and make but primarily in agricultural crops, dwarfs the water we drink and use directly as liquid, so these numbers aren’t theoretical. Food that’s wasted is food that has at some point put pressure on supply chains and contributed to food insecurity in supply constrained areas without benefit to anyone. It represents money spent for nothing. 

Waste is baked into price, and price drives availability and access. This is as true for food as it is for energy and everything else.

If we want fewer kids to go hungry, less land to get deforested, fewer chickens to get killed needlessly and more chocolate in our chocolate bars, we have to think as tactical as eggs on demand and as visionary as upcycling CO2 into edible protein. 

*****

One of the reasons I love working on climate is because it’s so hard. It sounds weird to say, but if we are to be successful in unraveling the wicked problems of climate change, we have to not only embrace the struggle but fully love it and have fun with it.

With that, I hope you don’t take today’s essay outlining upcoming challenges as yet another heavy weight on your mind, but rather as a presentation of opportunity areas for present and future great work.

See you out there! 

PS — Are you heading to SF Climate Week? Join me and my good friend and fellow investor Tommy Leep as we host AI for Earth, an event showcasing how specific innovators are harnessing the power of AI for climate impact.

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