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| World Food Prices Are Rising, But Not For the Reasons We Think | |||||||||||||||||
| Topic | Supply and Demand | ||||||||||||||||
| Key Words | wheat, corn, ethanol, subsidy, demand, income, supply | ||||||||||||||||
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| News Story | The prices of foods have risen to new highs globally in the last year, but we do not have a time of scarcity to blame for the high price. Rather, it’s coming at a time of great abundance. So what’s causing the price increases? First, incomes are rising in India and China. That’s not causing them to want to eat more food, but it is causing them to eat more meat. But as demand for meat increases, so does demand for other crops to feed the animals. Second, America has increased its demand for biofuels, specifically ethanol made from corn. That has resulted in a significant increase in global demand. Tie these together, and you have wheat at $400 per ton, compared to $200 per ton only six months previously. Corn costs $175 per ton, up from $150 per ton. But what is truly amazing is that the total cereal crop will be 1.66 billion tons, about 89 million tons more than last year. Further, the overall decline in global stockpiles has fallen by about 53 million tons – we are consuming more than we are currently producing. The bumper crop along with rising prices doesn’t bode well for relief any time soon. Part of the problem is that the US subsidizes its ethanol, and restricts imports of “greener” sugar-based ethanol from Brazil. The boom in biofuels has caused US farmers to plant more corn for fuel, and to take additional corn away from the food market. Both of these increase the price of corn, but also for other cereals whose supply has been restricted as a result of the shift toward more corn. What will the future hold? We’re not sure. Increased technology and productivity may play a role in increasing supply even further. Additional inroads in alternative fuels may mitigate the increased demand for corn to make ethanol. The US government could eliminate the subsidy on corn-based ethanol. The winners are obvious—the farmers in developed countries lucky enough to produce the cereal crops and reap the windfall from high prices. Ultimately the losers are those too poor to afford to purchase the crops. And in developing countries, these sometimes are the very farmers that export their own production to import other forms of food. The difference in the price they receive and the price they must pay are significant, and given the current trajectory for cereal crops, may only get worse. Governments do know what doesn’t work, and that is engaging in price controls. Russia tried this, and food disappeared from the shelves. Farmers couldn’t earn enough to cover their costs, and so stopped producing for the market. Venezuela tried it, too, with similar results. It seems that the best way to help those too poor to purchase expensive necessities is to allow the market to operate as it wants to, but then find different ways to make the poor better off. |
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| Source | "Cheap No More,” The Economist, December 6, 2007 | ||||||||||||||||
| Instructor Discussion Notes | Discussion
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