Global food prices: Why have they risen?

A worldwide increase in the price of basic foods is provoking anger and despair in many of the world’s poor countries. Both analysts and policymakers are attempting to rise to the challenge of understanding the reasons for the trend and what can be done.
Prices are surging for food commodities worldwide, posing a tough policy challenge for developing countries - can they protect poor consumers without crushing new opportunities for farmers?
Poor consumers across the globe are protesting about their rising food bills. In December 2007, Mexicans rioted in response to an enormous jump in tortilla prices, which quadrupled in some parts of the country; in January 2008, Indonesians took to the streets to protest high soybean prices; in February, protesters in three major towns in Burkina Faso, angry about the rising cost of food and other basic goods, attacked government offices and shops; unrest linked to food markets has occurred also in Guinea, Mauritania, Morocco, Senegal, Uzbekistan, and Yemen.
The new “agflation” that has riled poor consumers marks a sharp break with the generation following the mid-1970s, a period generally characterised by years of slowly falling food prices. The Economist reports that in 1974-2005, real food prices declined by 75%; but 2005-08, they have risen by 75% percent. Moreover, the price increases affect nearly every food commodity.
Prices of wheat, butter, and milk have tripled since 2000; those of maize, rice, and poultry have nearly doubled; those of meat, palm oil, and cassava have all gone up, too. Overall, the food-price index of the United Nations’ Food and Agriculture Organisation (FAO) rose by nearly 40% in 2007, compared with a 9% increase in 2006; in the first months of 2008, prices are higher than they have been in decades.
The years of falling food prices were good for consumers, but not so good for farmers. Now, while consumers in urban areas cannot be expected to welcome soaring food prices that eat into their wallets, the higher prices should theoretically reward farmers with greater profits and better livelihoods. Many media are reporting that high prices are good for farmers, which is true for much of the sector, but it’s more complex than that. Many poor farmers in developing countries are net food buyers.
The task for governments is to help farmers take advantage of higher prices to increase productivity - and thereby production and incomes - in order to improve their living standards and ensure that poor consumers who are already living on the edge are not pushed into destitution.
A confluence of factors underlies the dramatic rise in food prices. They include major new sources of demand for agricultural products. Millions of people in developing countries, especially fast-growing China and India, are benefiting from rising incomes; and their food preferences are shifting from grains and other staple crops to high-value products like meat, dairy, fish, fruits, and vegetables.
The new urban middle class in countries where diets were once based on rice or maize is now developing a taste for products made from wheat. And demand for meat is surging - per-capita consumption of meat in China, for example, more than doubled between 1990 and 2005 and is still growing, leading to rapid increases in demand for feed-grain.
At the same time, with petroleum prices up by 19% in February 2008 alone and now hovering around an all-time high of $117 a barrel, it has become profitable to divert maize and other feed and food-crops to biofuel production; new biofuel subsidies further encourage this trend. The United States produced a record maize harvest in 2007, but one-third of the harvest went to ethanol production as a market reaction to the new subsidies.
The profitability of biofuels, in turn, leads to higher prices in other commodities by causing farmers to switch from growing food-crops to growing biofuel feed stocks. The biofuel boom is ratcheting up demand for maize and other energy crops, and farmers react accordingly. High oil prices also make it more expensive to operate farm machinery and to transport agricultural products, and raise the cost of petroleum-based fertiliser.
Climate has played a role as well. Australia, one of the world’s largest wheat producers, has been desiccated by drought since 2002 - its worst drought in a century. Recent rains have led farmers to hope that the worst may be over, but the loss of much of the country’s last wheat crop was a serious blow to world markets. Extreme weather in other parts of the world - such as floods in West Africa and Mozambique - has also cut agricultural production.
In addition, speculation in commodity markets, stimulated by rising commodity prices, has contributed to more volatile prices. Speculation about future commodity prices influences current prices, exacerbating price increases, which in turn encourages more speculation. The volume of traded global agricultural futures and options increased by almost 30% in 2006.
The factors driving food prices go beyond the “invisible hand” of self-correcting cycles of supply and demand. In such a cycle, for example, demand goes up, causing prices to rise. In response to higher prices, producers increase production and consumers reduce their demand, and prices thus fall.
In this case, however, rising consumer demand from rapidly growing countries, higher energy prices, and even extreme weather related to climate change appear likely to continue. All indicators suggest that food prices are unlikely to fall any time soon and, in fact, may rise much more depending on countries’ decisions about biofuels.