Trade

Why Are Food Prices Going Crazy?

Corn
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Global wheat prices more than doubled in the second half of last year, according to a new report from the World Bank. The price of corn, sugar and cooking oil also soared.

Why are global food prices skyrocketing? Who is going to go hungry as a result? And what does it mean for the U.S.?

I recently put these questions to Abdolreza Abbassian, a food economist at the UN's Food and Agriculture Organization. Here's what he told me.

Skyrocketing Prices

Abbassian attributed the price rise to several factors — some familiar to me (and probably to you), some less familiar.

1. The rise of biofuels, like ethanol made from corn. This market, driven largely by government subsidies, has created demand that is what economists call "price inelastic" — demand stays strong even as prices rise.

2. More demand from the developing world, particularly for meat. Livestock eat grain, so increasing demand for meat means increasing demand for grain. This source of demand has also been price inelastic, Abbassian said.

3. Disappearing stockpiles.

Because of WTO rules, the U.S. and Europe have been moving away from subsidies that led to vast reserves of wheat and corn.

Subsidies still exist in the U.S. and Europe, but they've taken a different form. Governments used to buy and stockpile surplus food from farmers. Now it's more common for governments to give farmers subsidy payments without actually buying any of the food they produce, Abbassian told me.

This sounds super wonky, but it has a huge impact on the price of food.

Big stockpiles mean that the supply of food remains relatively constant, even when there are disasters like the vast fires that destroyed last summer's Russian wheat crop.

But in the absence of stockpiles, unexpected shocks like those fires in Russia last summer have a huge impact on supply. That, in turn, contributes to huge price spikes.

"What you get is a world market that is increasingly tight, without much of a buffer," Abbassian told me. "Without a buffer, you have volatility. It's as simple as that."

4. Speculation

The volatility created by declining stocks is in turn compounded by speculation — traders betting on the rise or fall of prices.

Abbassian argued that bringing more transparency to commodities futures markets might mitigate this issue.

"If we know who is buying it and what are they buying it for, that may get those who are just there to gamble to be more cautious about their positions," he said.

Who is going to go hungry?

At any given moment, there are about a billion people in the world who don't have enough food to eat. When food prices go up, more people do go hungry — but the increase isn't as dramatic as you might think.

That's partly because many of the world's poorest people simply have no money and no access to food. Many live in countries where wars and other crises make it hard to get food to people. They would be hungry even if the price of food had not spiked.

What's more, in many poor countries, the local harvest is a more important factor than the price of global commodities. And many countries in Africa have had strong harvests of staples such as white corn and cassava.

One often overlooked region likely to be hit hard by the price increases is Central Asia, Abbassian said. This recent FAO report has lots of region-by-region detail.

What does all this mean for the U.S.?

Despite the fact that the price of staples like wheat, corn and sugar have risen by more than 50 percent in recent months, the price of food in the U.S. has barely budged — food prices here rose only 1.5 percent over the past year.

That's because the price of food in the U.S. is driven largely by labor costs and other factors, rather than by the price of the ingredients.

"If you eat a loaf of bread in the West, 2 percent of the price may be the wheat-flour price," Abbassian said. "In the developing world, it's 70 percent."

What's more, Americans only spend about 10 percent of their income on food — a far lower percentage than what people in the developing world typically spend. So even when food prices do rise in the U.S., it takes a smaller bite out of the average household's budget.

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