Food Inflation


July 20, 2011 17:32 EDT

In 2008, protests broke out in countries as far apart as Haiti, Bangladesh, and Egypt. These protests were not the machinations of feuding political factions. People took to the streets because they were hungry. Food prices had risen to astronomical heights, making it difficult for the common man to put food on his table. As sharply as they had risen, food prices fell, easing mounting tensions in several parts of the world. But, just as the prices of agricultural commodities seemed to stabilize, food prices began to head skywards again. Food prices have now surpassed the highs reached in 2008, and are showing no signs of falling any time soon. Not only is it becoming difficult for much of the world to feed itself, but growth in countries like China and India are being stymied by high food prices as well. Human action, nature, and governments, it seems, are giving shape to a new kind of economics – one dominated by food. Will we able to feed the 6.7 billion people who inhabit this planet, and how much is it going to cost us?

New farming methods, the use of fertilizers and pesticides, and news strains of crops formed the bedrock of the green revolution that helped fill granaries and also feed much of the world. For several decades, farm yields were on the up. However, farm yields are growing at slower rates and even falling in several parts of the world. Over-pumping from aquifers has brought the water table down in arid countries and in countries that do not boast of extensive irrigation networks. Excessive farming, or the practice of not leaving land fallow, has drained the soil of several essential nutrients. For example, most arable land in India, the poster-boy of the green revolution, is deficient in one or more essential nutrients.  Falling yields are being compounded by mismanagement of the soil. Large tracts of arable land are being lost to deserts. Satellite images reveal large dustbowls in western China, Mongolia, and across central Africa. Countries like Lesotho, North Korea, and Haiti are already suffering falling agricultural outputs due to desertification.

The rise in food prices is due to a combination of several factors. While stagnant and falling yields are certainly a key factor, changes in government policies is having an impact on prices as well. For example, the shift towards bio-fuels has been blamed for the rise in prices of key agricultural commodities.

Over the last decade, there has been a sharp increase in bio-fuel production, mainly in the US.  More and more land is being allocated to the cultivation of crops that are used in the production of bio-fuels. For example, in the US, the area under cultivation for maize increased rapidly at the cost of soya bean production declining significantly. In other countries, food crops have been replaced by oil seed and sugarcane. This has reduced the area under cultivation of food crops, and lost output has led to the rise in the price of food crops. Moreover, as oil prices continue to rise, policy makers have begun to look at biofuels as an important alternative source of energy. Consequently, the price of sugarcane, oil-seed, and maize has increased as competing demands bid prices up.  

The increase in prices due to the increasing adoption of biofuels is unlikely to stop in the near future as policymakers in several countries are keen to increase the share of biofuels in their domestic markets. In order to reduce dependence on petroleum imports, several countries have set aggressive targets for the use of bio-fuels in transportation. Indonesia, Japan, Brazil and the European Union are looking to substitute energy produced using conventional fuels with bio-fuels by 10% by 2020. China has set a target of 5%, and the US has set a target of 30% by 2030. In order to achieve their targets, governments have provided support for the bio-fuel sector through subsidies, tax breaks, tariffs, and use mandates. Absent any government support for the production of biofuels, the adverse impact on food prices is likely to have been far lesser than what it is now.

The last few decades have been witness to unprecedented growth in the developing world, especially India and China. Rising income levels in these countries is leading to a change in general consumption as well as dietary patterns. The burgeoning middle and nouveau riche in these countries are eating more meat, pulses, fruits and other food items that were previously considered too expensive. Between 2000-2002 and 2005-2007, the share of meat, pulses, fruits, eggs, and milk in the diets of those living in China and India increased by 10 percent. This jump in consumption is further fuelling the rise in food prices as production and supply hasn’t really kept pace with the increase in demand.

Extreme weather conditions in the last few years have been another cause for rising food prices. Australia experienced droughts in 2006 and 2007 which adversely affected its food grain exports. The recent floods in December 2010 caused massive destruction to the wheat producing north eastern Australia as well. Droughts in Russia and China, and unseasonal rains in India resulted in extensive crop damage during 2010. Since price elasticity for food grains is quite low, prices normally rise significantly before consumption habits change. Global and local supply bottle necks only worsen the effect of shortages caused by extreme weather.

Governments across the globe have taken strong measures to check food inflation. In late 2010, the Indian government released five million tons of wheat and rice for sale in order to rein in food prices; similar steps have been taken by governments across the globe with mixed results. Countries like Russia, after losing about 20 percent of its wheat output, took aggressive steps to safeguard domestic food security and banned the export of wheat in August 2010. While this did ensure there was enough to pass around the table in Russia, there was less wheat reaching countries that depended on wheat imports. As a result of the export ban, wheat prices shot up on trading floors across the globe. Although the price of wheat has since fallen, the sudden spur in global wheat prices because of a decision to ban exports underscores how interconnected and fragile the global food network really is. Export bans can be far more detrimental than just causing the export of price inflation. As the prospects of earning good money in foreign markets dry up, farmers tend to reduce the land under cultivation and switch to crops that are likely to be more profitable. Indeed, the export ban on wheat in Russia is expected to result in the reduction of land under wheat by about two percent.

It certainly does seem like the days of cheap food are over. With a significant section of the world population on the cusp of starvation, a question far deeper than the rising price of food begs answering. How will we feed the 6.7 billion people who inhabit this watery planet? Does the answer lie in genetically modified crops? Are we witnessing the beginning of a global food politics? Only time will tell.

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