Why Did Global Food Prices Rise?

For the last 25 years global food prices have been falling, driven by the increased productivity and output of the farm sector worldwide. In 2007, this came to an abrupt end as global food prices soared. By September 2007, the world price of wheat rose to over $400 a ton-the highest ever recorded and up from $200 a ton in May. The price of corn (maize) surged to $175 a ton, some 60 percent above its average for 2006. An index of food prices, adjusted for inflation, which The Economist magazine has kept since 1845, hit its highest level ever in December 2007. One explanation for rising food prices has been increased demand. The increased demand has been driven by greater food consumption in rapidly developing nations, most notably China and India. Rising consumption of meat, in particular, has driven up demand for grains; it takes eight kilograms of cereals to produce one kilogram of beef, so as demand for meat rises, consumption of grains by cattle surges. Farmers now feed 200 to250 million more tons of grain to their animals than they did 20 years ago, driving up grain prices. Then there is the issue of bio-fuel subsidies.

Both the United States and the European Union have adopted policies to increase production of ethanol and bio-diesel in order to slow down global warming (both products are argued to produce fewer C02 emissions, although exactly how effective they are at doing this is actively debated). In 2000, around 15 million tons of American Corn was turned into ethanol; in 2007 the figure reached 85 million tons. To promote increased production, governments have given subsidies to farmers. In the United States subsidies amount to between $0.29 and $0.36 per litre of ethanol. In Europe the subsidies are as high as $1 a litre. Not surprisingly, the subsidies have created an incentive for farmers to plant more crops that can be turned into bio-fuels (primarily corn and soy beans). This has diverted land away from production of corn and soy for food, and reduced the supply of land devoted to growing crops that don’t receive bio-fuel subsidies, such as wheat. This highly subsidized source of demand seems to be having a dramatic effect on demand for corn and soy beans.

In 2007, fur example, the U.S. increase in demand for corn-based ethanol accounted for more than half of the global increase in demand for corn. What is complicating the situation is that high tariffs are shutting out producers of alternative products that can be turned into bio fuels, most notably sugar cane, from the U.S. and EU markets by high tariffs. Brazil, the world’s most efficient producer of sugar cane, confronts import tariffs of at least 25 percent by value in the United States and 50 percent in the European Union, raising the price of imported sugar cane and making it uncompetitive with subsidized com and soy beans. This is unfortunate because sugar cane is widely seen as a more environmentally friendly raw material for bio-fuels than either corn or soy. Sugar cane uses less fertilizer than corn or soy and produces a higher yield per hectare in terms of its energy content.

Ethanol is also produced from what used to be considered a waste produce, the fibre removed from the cane during processing. If policy makers have their way, however, the situation may get even worse. Plans in both the United States and the European Union call for an increase in the production of bio-fuels, but neither political entity has agreed to reduce tariff barriers on sugar cane or to remove the trade distorting subsidies given to those who produce corn and soy for bio-fuels. Brazil is not sitting on the sidelines; in 2007 it asked the World Trade Organization to probe U.S. subsidies to corn farmers for ethanol production.

Supplementary Reading article-Rising global food prices threaten to increase poverty. 2 Rising Global Food Prices Threaten to Increase Poverty  by Kata Fustos
(April 2011) Global food prices have been rising, threatening to reach record levels in the coming months if current trends continue. Growing world demand due to increasing world population and shifting consumption patterns, and lower supplies partly due to bad weather raised the World Bank’s food price index by 15 percent between October 2010 and January 2011.1 The index increased by 29 percent overall between February 2010 and February 2011. In January, the Food Price Index of the United Nations Food and Agriculture Organization (FAO) was at its highest level since tracking began in 1990.2 While not all countries are affected equally, the recent volatility is particularly alarming in regions where people spend more than half of their income on food. Global Food Prices Surge to Record Levels, Hurting the Poor in Low- and Middle-Income Countries A combination of unfavorable weather patterns around the world and uncertainty in the quality of wheat harvests in China has affected the global food supply.

Record heat and drought in 2010 in the former Soviet Union sharply reduced wheat production and dealt a shock to global wheat supplies. Extreme dry weather in Brazil—a major food exporter—contributed greatly to worldwide deficits of sugar, soybeans, and maize. Devastating rain and floods in Australia damaged wheat crops and reduced the yields of sugar harvests. Additionally, a severe drought in China threatens the harvest of the country’s wheat crop and has prompted the FAO to issue a special alert, characterizing the current situation as “potentially a serious problem.”3 For decades, China has relied mostly on its own domestic grain production and was absent from the global grain market. However, if the drought destroys a significant portion of the harvest and China has to import grain to fulfill domestic demand, the impact can shock the world market and cause even sharper increases in global prices. As a result of China’s buying power, it can outbid others in the global market, and secure supplies for its own population.

An expanding world population, greater reliance on crops as biofuels, and shifting diets continue to increase the collective demand for food, making the gap between supply and demand even wider. Since price volatility and growing demand are likely to persist, “we need global action to ensure we do a better job of feeding the hungry before we face the future challenges of feeding the expected 9 billion people in the world in 2050,” said Robert Zoellick, World Bank president.4 According to the World Bank index, global sugar prices reached a 30-year high in the beginning of 2011, after increasing 12 percent since January 2010. Edible oil prices have risen 73 percent since June 2010. Among grains, the price of wheat has increased the most, more than doubling between June 2010 and January 2011.

The price of maize has been affected by the surge in the wheat and oil markets and also jumped about 73 percent during the second half of 2010. Other food items that contribute to dietary diversity, such as vegetables and beans, have also experienced large price increases. Prices do not rise at the same rate in all countries; domestic markets are affected based on how well governments are 3 able to shield their population from global price surges through the use of subsidies, import taxes, and increased domestic production. Figure 1 Change in World Commodity Prices, January 2010 to January 2011 Source: World Bank, “Commodity Price Data (Pink Sheet),” accessed at

http://siteresources.worldbank.org/INTDAILYPROSPECTS/Resources/Pnk_0411.pdf, on April 1, 2011.

Although food prices had been increasing for seven consecutive months by February 2011, the price of all items had not grown at the same pace (see Figure 1). According to the World Bank’s Food Price Watch, this differentiates the current situation from the price surges of 2008, when food riots broke out across the developing world. Meat prices have stayed relatively stable over the past year. Following good harvests in exporting countries, the global price of rice was actually lower at the end of 2010 than in the beginning of the year, and it remains 70 percent below its 2008 peak. Therefore, rice provides a more affordable alternative grain to the poor and its accessibility has prevented more people from sinking into poverty and undernourishment. At the same time, some Asian economies have seen sharp increases in rice prices. In Vietnam, Bangladesh, and Indonesia—all high rice consumption countries—domestic rice prices increased over 30 percent in the past year.5 Soaring food prices disproportionately hurt the poor in developing countries.

This is especially true in regions where people spend a majority of their income on food and rely on a specific food product. Although some farmers and food producers are benefitting from greater profits, the net effect of higher prices is a rise in the number of the poor. The World Bank estimates that an additional 44 million people have fallen into poverty in the developing world as a result of higher food prices. Overall, the number of chronically hungry people began to climb again after a brief decrease to 925 million in 2010 (see Figure 2). According 4 to Zoellick, “the trends towards the 1 billion are worrisome. Global food prices are rising to dangerous levels and threaten tens of millions of poor people around the world.”6 Figure 2 Distribution of Undernourished People in the World in 2010 (in Millions) Source: FAO Statistics Division, accessed at www.fao.org/economic/ess/en/, on April 7, 2011. India Especially Affected by High Prices

Food prices are rising faster in India than in other large economies. As the country’s population continues to grow and middle class incomes rise, there is increasing pressure on the government to provide food for the entire country. Despite rapid economic growth over the past decade, India still struggles to feed its population: According to the 2005/2006 National Family Health Survey, 40 percent of children below the age of 3 were underweight and 45 percent were stunted.7 Lack of investment has kept domestic agricultural productivity low as manual labor remains the dominant source of domestic food production. In 2008/2009, agriculture employed about 52 percent of the labor force, but only made up 13 percent of India’s GDP.8 Farming and agriculture remain greatly inefficient and inadequate for feeding the country’s 1.2 billion people. Low production and an unusually wet summer in 2010 contributed to the current domestic food inflation that reached a 16 percent annual rate in January 2011.

This composite figure masks the rise in the price of some staples, such as onion and garlic, which rose by 71 percent during the past year. The sharp increase is most alarming for the 41 percent of the population in India who live on $1.25 or less a day and spend a majority of their income on food, as even basic items are becoming unaffordable.9 The government is responding to the current crisis by providing heavy subsidies for agricultural production and by importing increasing amounts of some staples, such as lentils and beans, to ensure their availability. It has also put export restrictions on certain products to keep them for domestic consumption.10 These policies can only provide temporary solutions, however: Long-term investment is required in agricultural research to improve the quality of seeds, irrigation techniques, and modernize other production components.

References

1. World Bank, “Food Price Watch” (February 2011), accessed at www.worldbank.org/foodcrisis/food_price_watch_report_feb2011.html, on Feb. 17, 2011. 2. Food and Agriculture Organization of the United Nations (FAO), “Global Food Price Monitor” (Feb. 3, 2011), accessed at www.fao.org/giews/english/gfpm/GFPM_02_2011.pdf, on Feb. 16, 2011. 3. FAO Global Information and Early Warning System on Food and Agriculture, “Special Alert: A Severe Winter Drought in the North China Plain May Put Wheat Production at Risk” (Feb. 8, 2011). 4. World Bank, “Food Security Fears Rise Along With Prices” (April 2011), accessed at http://go.worldbank.org/VCXQZNWRA0, on April 7, 2011. 5. World Bank, “Food Price Watch” and FAO, “Global Food Price Monitor.” 6. “Food Price Hike Drives 44 Million People into Poverty,” World Bank Press Release No: 2011/333/PREM (Feb. 15, 2011), accessed at http://go.worldbank.org/OFGV8BZN20, on Feb. 17, 2011. 7. National Family
Heath Survey, “Key Indicators for India” (2005-06), accessed at www.nfhsindia.org/pdf/India.pdf, on Feb. 16, 2011. 8. Ministry of Finance, Government of India, “Economic Survey 2010-11” (February 2011). 9. UNDP, “Multidimensional Poverty Index,” accessed at http://hdr.undp.org/en/media/HDR_2010_EN_Table5_reprint.pdf, on Feb. 17, 2011. 10. Corey Flintoff, “Food Price Surge Puts Strain on India’s Poor,” NPR (Jan. 6, 2011). 11. Renuka Mahadevan, “Productivity Growth in Indian Agriculture: The Role of Globalization and Economic Reform” Asia-Pacific Development Journal, Vol. 10, No. 2, December 2003.