Global food prices have been skyrocketing in recent months, with global food commodities 60 percent higher than just two years ago. But can increased demand, driven by developing nations, explain such a meteoric increase? If China has been humming along at double digit growth for a decade, why are food and energy prices only now catching up with us?
In a report released this month, Ronald Trostle of the Economic Research Service, part of the USDA, explains the many factors that have led to these rapid price increases. Perhaps a disappointment to some, the causes are not as simple and straightforward as we may want them to be, and there is not one culprit (“demon ethanol,” speculation, OPEC, etc.) that deserves the sole responsibility or blame for the current situation.
Rather, the factors that led us to this point are many and complex, and likewise the remedies will be long in coming and involve difficult adjustments. Famed investor Jim Rodgers said in a recent interview with Barron’s that the commodities bubble may last until 2018. But understanding the roots of this bubble is the first step in bringing much needed relief to the people of developing nations, and Trostle has brought to light several causes worth exploring:
Robbing the kitchen pantry--The relative stability of prices in the 80s and 90s led governments to decrease their buffer stocks because more liberalized trade meant they could depend on the global market for food. So, as they drew down their grain stocks, they increased their dependency on other countries for their immediate food needs while limiting their ability to absorb price shocks and shortfalls abroad. In fact, the global stocks-to-use ratio has fallen from 30 percent in 1999 to less than 15 percent today, the lowest level since 1970
A day of reckoning--Now more vulnerable to shocks in the global food market, harvest shortfalls occurred in a number of regions around the world in 2006 and 2007 because of adverse weather conditions. These shortfalls cumulatively led to back-to-back drops in global average yields of grain and oilseeds, something that has happened only three other times since 1971. Without the benefit of a backup supply of grain stocks, this led many countries to promote protective policies like eliminating export subsidies and increasing export taxes, restricting or banning exports, and this seized up markets and induced a buying panic.
If you don't eat your meat--Changes in dietary preferences of rapidly developing nations mean more people are eating meat, which requires more grain. For example, to raise one lb. of beef, you need 7 lbs. of grain; For one lb. of pork, you need 6. 5 lbs. of grain. So as people in developing nations are lifted out of poverty, undeniably a good thing, their preference for more meat increases demand for grain and puts more pressure on already strained supplies.
Fields of fuel--Increased biofuel production, mostly a result of a Federal mandate that required a noxious fuel additive to be replaced with ethanol, led vast amounts of corn and soy to be diverted from food production to fuel. While one cause among many, this stress on food prices has been singled out by many as the culprit in rising prices and legislators may move to alter the 2007 energy bill in order to relieve this added pressure.
They're in the money--Because of large foreign exchange reserves held by net importers of food like the oil-exporting nations and countries with large trade surpluses like China, high-priced commodities continue to be bought at the expense of developing nations without those large currency reserves. This means that nations most unable to deal with rising food prices are the ones hit hardest by them.
The high rollers' suite--Many are now starting to question the role of hedge funds, index funds and sovereign wealth funds in speculating in and possibly exacerbating high commodity prices. In 2006 more of these investing arms became involved in commodities, often with long-term buying positions. Under pressure from farming groups, the Commodities Futures Trading Commission is considering closing a loophole that currently allows hedge funds to speculate with more money than previously allowed.
