farmgate: PSSST! Ya Wanna Know The Real Reason Behind High Food Prices?
The rise in grain and oilseed prices has been appreciatively received by owners and operators of cropland, but those rising prices mean someone has to pay more, and livestock producers know how consumers feel about it. Everyone who buys food, whether it is in the US or abroad, is paying more for food. Don’t blame corn growers and soybean producers, because there are a multitude of reasons that food prices have risen. And they go well beyond the farmgate.
US headlines have blistered US agriculture for causing food prices and fuel prices to rise, blaming farmers, ethanol, the unwritten Farm Bill and everything else that mad consumers can point toward. Prices for food commodities have risen around the world, not just in the US, but USDA economist Ronald Trostle says there are a myriad of reasons for the spike. His analysis looks at the reasons, the impact, and prospects for the future.
A 60% rise in world market prices of food has occurred in the past 2 years, which is even more significant than on the surface because since 1980 nominal food prices have generally declined. A slow rise began in 2001 and in 2006 a sharp rise began for the four principle grain commodities of corn, wheat, rice, and soybeans. For the past 38 years, periodic price spikes have occurred so the most recent is nothing new, but in the past the prices have retreated because buyers switch to alternate products. Parallel to the recent spike in prices for those four grains, food commodity prices have risen 98%, the index for all commodities has risen286%, and the index for crude oil has risen 547%. While food grain prices have not risen as much, in the big picture they form the staples for foods around the world, and such a rise has caused hardships in many poor and developing countries.
The recent rise in food prices has come amidst another series of developments that have an impact on the overall perspective:
1) Public funding of agricultural research in the US and abroad has been declining and along with that trend, the increase in average crop yields has declined.
2) A small percentage of farmland around the world is annually diverted to non-farm use.
3) Water resources have been stressed and artificial systems have become expensive.
An even more significant trend has been the combination of rising world population and its increasing economic power, which allows people to buy more food and higher value food. These trends have been quite prominent in China and India, with 40% of the world population. Their additional demand for energy and oil has also grown substantially.
The growth in per capita income in developing countries has allowed poorer populations to feed their hunger with higher quality food, particularly meats that were produced with protein feeds. Growth rates for meat consumption have surpassed that of consumption for grain and oilseed-based foods. With the increased demand for meat comes an increased demand for livestock feeds.
Since 2000 many smaller trends have occurred that have exacerbated the population and economic growth and their impact on food demand. Those smaller trends include:
1) China made a policy decision to reduce its stocks of food for “just in time” inventory, as a result of readily available global supplies and more liberalized commodity trade.
2) Global stocks have declined from an average of 30% in 1999 to 15% in 2007.
3) In 2000, crude oil prices began a slow, then more rapid rise along with an increased demand for energy.
4) In 2002 the US dollar began to depreciate in value, losing value in relation to the currency of importing countries, and since the US is a major food producer, food exports increased as commodity prices became cheaper to the buyer.
5) Since world commodity and oil prices are denominated in dollars, the declining value of the dollar spurred demand for both food and oil in countries where monetary values were relatively stronger.
Biofuels have had an impact, since ethanol is typically made from corn except in Brazil, and oilseeds are the feedstock for bio-diesel. The movement toward biofuels is global, and many countries are making them, not just the US. China has become a major ethanol producer, and is focusing on cassava and sweet potatoes for feed stocks. The EU is the largest bio-diesel producer and is refining rapeseed as the feed stock, but does not produce enough to meet policy goals. Brazil will be converting interior-produced soybeans into bio-diesel for domestic use, and Argentina will be producing soybean-based bio-diesel for export. In the US, about 24% of the corn crop is used for ethanol and that amount will increase as production increases. In the past five years, US ethanol production has had a more pronounced impact on the world supply/demand balance for grain, and the higher prices of US corn has spilled into world markets. Globally, an estimated 21 million acres were used worldwide to produce feed stocks for bio-fuels, however as the total world area of cropland expands, more of the increase is used for bio-fuel production than for food production.
Many recent developments, both closely and distantly related to food prices, have fueled the fire of rising food prices.
1) High fertilizer, fuel, and pesticide prices have resulted in some production cutbacks, and causing commodity prices to rise.
2) Higher commodity prices in 2006 drew the interest of market speculators, who were not interested in a commodity itself, but in a potential for increasing market values that would benefit their portfolios.
3) The 2005 Energy Policy Act caused a quick replacement of MTBE with ethanol.
4) Many global grain producers experienced adverse weather in 2006 and 2007, reducing supplies in consecutive years.
5) As corn and soybeans reached relatively high prices in 2007, importers tended to buy greater quantities, pushing up prices and reducing stocks.
6) Many countries with large reserves of foreign exchange or oil revenues were able to buy as many food commodities as they wanted.
When food prices began to rise, many nations changed domestic policies that would benefit their citizens, and in many cases caused a further rise in world food prices. Some of those policies either halted or taxed commodity exports in an effort to retain as much food within the country as possible. That reduced the available supply and prices rose. Other countries reduced taxes on imported commodities in an effort to acquire more food at a lesser price to their consumers. That increased the demand and prices rose. Other countries initiated food imports, which additionally increased demand.
The global impact on higher food prices has a greater effect on the lower income populations who 50% of their income on food, than on higher income countries which spend 10% of their income on food. USDA says a 1% rise in food prices in the US would be a 21% rise in that other country. Additionally, many nations receiving food aid donations have received less, because the food is more costly to acquire by the donating country and shipping costs have increased. Consequently, social unrest has occurred in many lesser developed countries were food is either unavailable or too expensive.
Summary:
The price of food is a function of supply and demand. Over the past two years changes in both supply and demand have combined to cause a significant upward spike in global food prices, and in some countries causing social unrest. Regarding supply, adverse weather has reduced production, public policies have reduced stocks, and the trend toward biofuels has shifted supply away from food to fuel. Regarding demand, the devaluation of the dollar has cheapened the price of commodities based on the dollar, many growing economies have larger populations with more buying power and more hunger for higher value foods, and rising petroleum prices have increased production costs or curtailed production.
Posted by Stu Ellis on May 12, 2008 12:58 AM to farmgate