Saturday, April 26, 2008

The Cost of Food: Why?

Food Prices have increased dramatically world wide in less than a year. Why? The world is a big place and the systems involved are complex, so one should beware of "simple" answers. Three root causes are often referred to:

1. Biofuels
2. Meat consumption in China
3. Oil prices

I think all of these causes may have contributed to increased food prices. However, increasing meat consumption (and the related increase in grain consumption) is a relatively gradual phenomena. Oil prices have risen suddenly, but a great deal of the food in circulation right now was grown before oil prices changed the most. Also the change in food prices does not track very well against the change in oil prices.

The biggest single change appears to be subsidies for biofuels. The global warming scare, increasing oil prices, and a fear of dependence on foreign oil all contributed to rich countries deciding to offer large monetary incentives to the producers of biofuels. In effect, our tax dollars are being spent to turn food into fuel. The tax dollars were required because for the most part it is still more expensive to grow food and turn it into fuel than it is to pump oil out of the ground (or use coal, nuclear, and other options). There is a hope that at a large enough scale, food to fuel conversion will stand on its own in a competitive market for fuel. But that is certainly not the case right now, particularly for ethanol.

Last year the price of corn jumped dramatically in direct response to ethanol subsidies. Corn is by far the largest crop in the world. The U.S. is by far the largest grower and exporter of corn.
I believe that this sent a ripple of price increases through the overall world market for grains. Once the ripple began, new factors began to dominate grain prices: fear and greed. People who buy grain to eat became increasingly concerned about the prices going up. Many people respond by "storing up" some food before prices get higher. Of course very poor people cannot "store up", they can barely afford enough food each day to keep them alive. People who sell grains are tempted to hold back some of their grain until prices go even higher. The storing up by consumers and holding back by suppliers create shortages that are really an artifice of the supply chain as opposed to a fundamental lack of production. Once shortages are perceived to exist, prices go even higher and vicious cycle continues.

So what will happen next? God only knows. However, we may anticipate a lot of turmoil as countries and their citizens take action in response to the high prices. Political unrest. Trade embargoes. Food riots. Those are all happening right now.

The sad thing is that in a year or two, this will all suddenly vanish. In fact, it is likely that grain prices may suffer lows in future years as the grain that has been stored up or held back is released for consumption.

The people who will be hurt the most are those who live day to day or week to week. The poorest among us all. Helping them will be much more expensive because buying grain at current prices has become more expensive.

I am not a bumper sticker sort of guy. However, if I were I would most certainly buy a bumper sticker that says My Car Burns Gas Not Food.

I already opposed subsidies for biofuels for other reasons. Now I will be an implacable foe of such schemes. Perhaps we meant well with our efforts to promote "growing" our fuel. The result however is hunger for millions upon millions. It has been referred to as the "silent tsunami".
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