A Perfect Storm Hits World Food Supply

Throughout the developing world, food riots are occurring. Corn (maize) prices are 50% higher than they were at the beginning of 2007, wheat prices are almost double, and rice prices have nearly trebled. American feel a little of this pinch, but poor people in the developing world are most affected.

Josette Sheeran of the UN’s World Food Programme was quoted in The Economist newsmagazine  on the impact of food prices increases in poor countries:

“For the middle classes, it means cutting out medical care. For those on $2 a day, it means cutting out meat and taking the children out of school. For those on $1 a day, it means cutting out meat and vegetables and eating only cereals. And for those on 50 cents a day, it means total disaster.”

For perspective, consider that one billion of the world’s people live on less than a dollar a day, and another one and a half billion live on between one and two dollars a day. That’s almost half the worlds population affected by the problem.

Why the sudden increase? There are a handful of reasons:

  1. Crop production has suffered in many parts of the world from storms, droughts, and floods linked to climate change.
  2. Demand is rising, as world population grows, and as consumers in rapidly industrializing countries like China demand more grain-fed meat.
  3. Fertilizer prices are at historic highs thanks to a growing shortage of natural gas, the main ingredient in nitrogen fertilizers. Farmers are also hit by the global credit crunch stemming from the U.S. sub-prime mortgage crises, and they are unable to borrow money for equipment, fertilizer, and advanced seedstocks.
  4. Government investment in basic crop research has plummeted in both developed and developing countries. Green revolution technology is an escalating arms race against rapidly evolving pathogens and weeds, and requires ever increasing investment to maintain crop yield advances.
  5. Rich countries have promoted biofuels made from food crops as a way of decreasing reliance on oil. The WFP’s Sheeran estimates that oil prices over $70 a barrel  make grains attractive as an alternative source of liquid fuels for transportation, essentially pitting cars against poor people as consumers of crops.

Together these factors make for a perfect storm affecting world food prices.

But wait,…won’t the market take care of this? After all, if prices rise, won’t farmers simply produce more food, and make more money?

That might work with widgets produced in neoclassical undergraduate textbook factories. In the real world, it takes at least one growing season to respond to price rises, since food takes time to plant and to harvest. In the meantime, price can rise quite a lot without affecting supply. In addition, there are other constraints (like numbered items 1, 3, and 4 above).

What do we do? Many argue that we must get over our expectation of cheap food—after all, it is market manipulation by many governments that keeps food as cheap as it has been over the last half-century—an intentional effort to keep social unrest at a minimum. Adjusting our social safety nets to account for higher food prices will mean additional, targeted assistance to the poor.

Economists will argue (and they’re right) that it’s better to give people money rather than in-kind assistance. First world food aid has been an enormous detriment to third-world farmers. It should really be seen for what it is—an elaborate dumping scheme for rich world agricultural overproduction. Major international charities are rethinking their use of direct food aid, with at least one (CARE) now refusing to wreck the agricultural economies they’re trying to help by refusing to distribute rich world food aid.  Abandoning our ridiculous support for biofuels made from corn would also help, since we are making ethanol production even more attractive with uneconomic subsidies. That’s the peril of starting the election season with Iowa caucuses.

For the World Food Programme to distribute as much food aid this year as it did last year, it will need an infusion of cash in the amount of $700 million dollars. The United States has yet to make a commitment to this emergency fund.

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