The headlines have been scary, and they have shaken the complacency of many in the industrialized world about the price of food. “The World’s Growing Food-Price Crisis” (Time). “Food Prices Soaring Worldwide” (Associated Press). “Hundreds Protest Against Food Prices in Senegal” (Reuters). What’s going on? Is the world running out of food?
Hardly. In 2007, food production per capita (the amount of food grown and raised in the world, divided by the number of people in the world) increased – as it has in nearly every year since the 1960s, when technological innovations in agricultural production sparked an increase in the food produced per acre of arable land. This wave of innovation and increase continues, and yields per acre actually have continued to improve unabated – by more than 1% in 2007 alone. There is more food for each person today than there ever has been in all of human history.
So there isn’t any less food. And there hasn’t been a huge increase in population; world population growth rates are leveling off, not increasing. We’ve got plenty of food and we aren’t overstocked on human beings. Yet, the price increases are very real – the world market price of wheat doubled in 2007. Rice prices are at a ten-year high, world milk and meat prices have more than doubled, and soy prices are at a 34-year high – the last time it cost this much to buy a bushel of soybeans, Jimmy Carter was in the White House.
What else comes to mind when the name Jimmy Carter is mentioned? That’s right – skyrocketing energy prices. We still have plenty of food. It’s just that it is costing a lot more to produce that food, and the main culprit is high energy prices. Energy prices aren’t the whole story, however – there are other components to this price spike and we’ll discuss each of them in turn.
Production problems, oddly enough, are not really a major component of the price rise. Remember, total food production is up, not down – there are production problems every year, simply because food is grown everywhere in the world. When something happens everywhere, there are always going to be problems somewhere. Unrest in Bangladesh and drought in Australia make good news stories, and certainly can cause local price spikes, but they are not major contributors to the spike.
The main reasons for the price spike are fuel prices, diversion of cereal crops to biofuels, and inefficiencies and market distortions caused by agricultural subsidies.
Fuel prices might seem an odd reason for a major price spike. Sure, it costs more to drive the bread to the market, but transportation costs aren’t a huge portion of food costs – and surely driving the tractors around the field can’t use that much gas? The increases in fuel prices that we’ve seen wouldn’t double the costs of getting grain to the store, even if fuel was the only component of agricultural prices. The direct costs of transportation fuel are part of the story, but the real mechanism is that higher fuel costs translate into very large increases in fertilizer costs.
Petroleum products are the raw feedstock for artificial fertilizer – and artificial fertilizer is what has driven the “green revolution” that makes increased agricultural yields possible. Put simply, you cannot have a modern farm without modern fertilizer – even organic farms are using petroleum-based fertilizers. When oil prices spike, as they have dramatically done, the costs of buying fertilizer go through the roof. That has a direct, bottom-line impact on what farmers must charge for the crops they grow.
The rise of biofuels – gasoline substitutes produced from crops that use ethanol or methyl alcohol (among other organic products) in place of petroleum – has also contributed to the price spike. It is hoped that in future years, biofuels production will come primarily from waste agricultural matter – stems, stalks, and other byproducts that have limited or no food use. However, at the present time and state of technology, most biofuels come from crops like corn which are used both for direct human consumption and for feeding dairy and beef cattle. The impact of this can be overstated; approximately 100 million tons of grain are diverted to fuel use each year. This sounds like a lot of grain, but the world produces about 2.316 billion tons of grain annually – biofuels are taking 1 ton in 23. It’s not nothing, but it isn’t the end of the world. It is likely that rising crop prices in general are spurring the development of biofuels refining techniques that use agricultural waste products, leftovers and byproducts, rather than having to compete on the increasingly tight grain markets.
Subsidies and regulations in markets that distort the markets from reflecting real prices are another culprit in the spike. Subsidies encourage farmers to plant certain crops, or to avoid certain others –and the choice of what is subsidized is rarely the choice that the market (i.e., everyone doing what they wanted to do) would reflect would make. The subsidies vary by nation, making the distortions to food markets chaotic. All of this contributes to a generally inflationary atmosphere, where things cost more than they need to cost, were the price of the things being set by an undistorted market. There is also little reason to believe that agriculture subsidy programs will be repealed as each country is motivated by rational self interest.
Food prices are likely to remain high for some time. Energy prices do not show any signs of returning to less exaggerated levels, and biofuels will continue to add their small but increasing impact on food prices. The normal reaction of governments to high market prices is to increase their regulatory hold on the area of the economy in question; that is likely to improve local situations at the cost of decreasing the efficiency of the food production system in general.
From my point of view, it is not certain that the world’s food economy can afford a loss of efficiency at the present time; we are asking a very large and impressive machine to continue performing impressively (and even to improve itself) under very difficult circumstances. The food price crisis in places where this represents real hardship (rather than a limitation of one 50-pound sack of rice per person, as has been the case in a few US discount stores) can be ameliorated by food aid; that aid has become more expensive, but increasing direct food aid budgets is significantly cheaper than making the entire farm system less effective through regulation.
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