The recent hike in food prices has been cause of international alarm. Between 2006 and 2007, the general index of food crops has grown by 23.6%, but in the first quarter of 2008, average monthly increases were 5.7%, with peaks of 9% for wheat, corn and rice, and 6.8% for oils and fats (FAO).
Such increases in food prices are due to three major causes. Firstly, demand growth, caused by demographic expansion, income growth and changes in consumption patterns in emerging economies, China and India especially, toward diets that are richer in meat (leading to the use of land for pastures instead of crops). Secondly, the contraction of supply in countries that are major agricultural producers, due to massive droughts and repletion of cautionary stocks. The third cause is the recent development of biofuels.
Two other factors are also affecting the cost/price of foodstuffs: the dramatic increase in the price of oil, which enters agricultural production as both an input for fertilizers and as a fuel for tractors, and financial speculation triggered by the oil shock, since it drives investors toward cereals and other commodity markets, to seek refuge against inflation. There is sufficient agreement on the list of five factors, but not on their relative weight.
Many have found the main culprits to be biofuels. However their responsibility in making food more expensive is limited. Demand for cereals for biofuel production has grown strongly, but it still only accounts for 4-7% of global production. Most of it is US corn used to manufacture ethanol. It accounts for 27% of the US domestic market, while seed and palm oils are largely destined to the food industry and the production of detergents. Land competition between biofuels and foodstuffs could become significant in the near future, and thus cause the relative price of food to grow, if demand stays strong (and the spread of American eating styles goes on unabated). However, this could be partly solved by the development of second-generation biofuels, whose energy yields per unit of land are far higher, which make extensive use of agricultural wastes and byproducts, and by the spread of existing species, such the Indian weed jatropha, which do not compete with crops planted for human consumption, since they grow on dry land not suited for either corn or wheat.
Development of second-generation biofuels is being accelerated by public incentives. For instance, a EU Directive is being drafted that would encourage production of biofuels obtained from non-food cellulose, wood residues, and other vegetable wastes. Also oil and chemical industries are heavily investing in the development of new biofuels. Feedstocks represent 70-80% of the production cost of biofuels. And as the price of food increases, the price of biofuel increases, too.
At any rate, the end of the age of cheap food has caught most observers by surprise. The fact that price increases of this magnitude were largely unexpected is a sign that the speculative component is significant. However, it’s not all for the worst: the Financial Times reports that farmers are switching from opium to wheat, since the price of the latter has grown so much.
by Augusto Ninni,
Research Director at IEFE, Bocconi Institute of Energy and Environmental Economics, and Professor of Industrial Economics, University of Parma