High Food Prices — Why Are They Rising?
Kurt Brouwer April 22nd, 2008
Most of us have heard about high food prices, particularly for commodities such as corn, wheat, rice and other staple foods. Why are they going up and why now?
I first experienced the vagaries of the international food trade when I spent nearly a year in Mexico in 1974. On my way to beautiful and remote Tenacatita Bay (south of Puerto Vallarta), I passed through miles of banana groves, lush with fruit.
Yet, in the little tiendas (stores), bananas were not to be found. Nor was coffee to be found even though it was a huge, local crop. Instead, all the bananas and the coffee beans shipped off somewhere else. Nothing wrong with that, but it illustrated the disparities caused by modern distribution systems. Those farmers knew they could make more producing for export than selling locally. So, they made a wise economic decision.
Now, when it comes to agriculture, we are seeing a similar impact because it’s more lucrative to devote cropland to producing corn for the ethanol market than for food.
Source: Wikipedia Commons - USDA
Food Crisis Shows How Bad Policies Can Be Deadly (Bloomberg, April 21, 2008, Kevin Hassett)
Sometimes, bad economic policies create small annoyances. Sometimes, they lead to catastrophes.
For years, the U.S. has heavily subsidized the production of corn-based ethanol. The global impact of that policy is beginning to lean toward the latter category.
There is no question that subsidies have had their desired effect: An enormous share of the grain crop is now devoted to energy production. How much? A new World Bank report states that “almost all of the increase in global maize production from 2004 to 2007 (the period when grain prices rose sharply) went for biofuels production in the U.S.” Go back and read that sentence a second time. It is stunning.
With the world population growing, and incomes rising, increased food production is necessary to maintain an acceptable level of basic human welfare. Since 2004, corn production available to individual consumers hasn’t budged.
While corn isn’t the only foodstuff out there, it is an important one, and a shortage has led to soaring prices for just about every grain. Again according to the World Bank, from February 2005 to February 2008, overall global food prices increased 83 percent…
I don’t think you can lay all the blame for higher food prices on the U.S. subsidy for corn-based ethanol production. Certainly, this has been a significant issue, but other contributing factors exist. For example, higher energy prices push up the cost of producing, processing and shipping food, not to mention the cost of common fertilizers.
In addition, I am certain that speculation and fears of scarcity combine to create hoarding. In general, the world’s economy produces only the commodities we actually need and it does not take much in the way of additional demand to cause shortages. Over time, additional demand should bring about more supply, but that does not happen quickly.
Anyone have a different take on why food prices are up so much?
Very Quick Update: Ask a question and you get an answer. Another reason for higher prices is drought. Thanks.
A Bay Area television station (NBC11) reports that Costco is requesting that shoppers restrict their purchases of rice to avoid shortages due to hoarding.
The report also mentioned a drought in Australia that has led to rice shortages. Australia grows rice? Who knew?
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funny I was just down the road in Barra de Navidad in 1974
Don — I passed through Barra de Navidad in 1974 also. After traveling in the interior of Mexico for a few months relying solely on my modest Spanish language skills, getting off the bus in Barra was quite amazing because of all the Californians who were there at that time.