Corn has soared 52% the past 12 months. Sugar’s up 60%. Soybeans have jumped 41%. And wheat costs 24% more than it did a year ago.
By Oliver Bunic, Bloomberg News
A customer browses for bread at a store in Belgrade, Serbia, on March 7.
By Oliver Bunic, Bloomberg News
A customer browses for bread at a store in Belgrade, Serbia, on March 7.
For about 44 million people — roughly the population of the New York, Los Angeles and Chicago metropolitan areas combined — the rise in food prices means a descent into extreme poverty and hunger, according to the World Bank.
The surge in food prices has many causes. Rising population. Speculators. Soaring oil prices. Trade policies. And, ironically, improved standards of living in emerging nations.
By itself, the soaring cost of food didn’t cause the political unrest in the Middle East and elsewhere. Those tensions have been building for a long time. But higher food prices amplify those tensions.
“It exposes the underlying inequalities and issues related to the standard of living that boil beneath the surface,” says Tony Crescenzi, portfolio manager at Pimco.
What goes up
You’re paying about 6.8% more for that steak than you did a year ago, according to the Bureau of Labor Statistics. Fruits and veggies are up about 4.3%.
In the U.S., the effect of higher food prices has been modest. U.S. consumers spend about 9% of their income on food, and another 3% for dining out.
And raw materials prices are just one facet of many factoring into the cost of our food. The farm value of food — what goes to the farmer — is about 19% of the cost in the U.S., according to the U.S. Department of Agriculture. The rest goes to labor, packaging, transportation, energy and corporate profits.
In many emerging markets, however, 50% or more of a family budget goes toward food — not because food is so expensive, but because income is so low. Kick up the price of wheat or rice or corn, and you’re spelling the difference between having two meals a day or one.
“For many people who spend two-thirds or three-quarters of their income on food, even small price increases disrupt normal routine,” says Hassan Zaman, lead economist for the World Bank in poverty reduction and equity. “They start sacrificing non-food items, such as clothing, and then start eating less.”
Hunger and desperation
Because many emerging markets have high unemployment, one result is a large number of unemployed men desperate for ways to feed their families. When Mohamed Bouazizi set fire to himself in Tunisia in December, it wasn’t because he was yearning to vote. It was because he couldn’t feed his family and police had confiscated the fruits and vegetables he was trying to sell.
The World Bank’s food index has soared 29% from its level last January and is just 3% below its 2008 peak. An above-average African harvest and a stable rice market have prevented the current food crisis from exceeding 2008, the World Bank says.
What’s causing rising food prices:
Speculation. Economists downplay the role of the futures market and speculators in driving up food prices.
Futures contracts have a limited life, and when they expire, they equal the current spot price. Short-term price spikes driven by speculation “will play itself out,” says Dan Seiver, economist in the finance department of San Diego State University.
But short-term or not, speculative spikes can have a big impact. “If you’re starving, the short run is pretty interesting,” says Paul Kleindorfer, professor of sustainable development at INSEAD, a business university based in Fontainbleau, France.
Energy. You need energy to make fertilizer, drive tractors and take food to market. More important, however, a great deal of land is now being planted for corn that will be made into ethanol.
“As energy prices go up, so do the incentives to produce ethanol,” says the World Bank’s Zaman. “The past three years, the percentage of the U.S. corn crop that has gone to ethanol has gone from 31% in 2008 to more than 40% projected in the 2010-2011 growing season.”
And the more land that goes to corn, the less land there is planted with other crops. The U.S. had 63.2 million acres planted in wheat in 2008, says the Department of Agriculture. That fell to 53.6 million acres in 2010. Corn acreage rose from 86 million acres to 88.2 million in the same period.
Trade restrictions. When crops fail — or fall below expectations — countries often ban exports. “That drives up prices immediately,” says San Diego State’s Seiver. Russia, for example, imposed an export ban on wheat in August after drought and fires devastated the wheat crop. Prices shot to a two-year high.
Affluence. In China and India, among other countries, the economies have been booming and people have grown wealthier. As a result, they’re eating better, which drives up the cost of food. “Per-capita calorie consumption quintupled from 1961 to 2007,” says Juerg Trueb, managing director for Swiss Re. And as affluence rises, so does demand for meat — the production of which increases demand for corn and other feeds.
Population. All other things being equal, a rising population increases demand for food. The world population is now 6.8 billion, more than double the 3 billion in 1960.
What’s being done
Aid for hunger relief is unlikely to grow this year, at least from the United States, which is worried about cutting its budget deficit. A Jan. 31 USA TODAY/Gallup poll found that 59% of respondents favored cutting foreign aid, which is just 1% of the U.S. budget.
Of course, rising demand should bring more supply, says Pimco’s Crescenzi. “High levels of pricing is good in terms of investment in supply,” says Crescenzi. “Just as rises in the price of oil leads to increased drilling and a higher rig count.”
Technology may help, too: The Green Revolution in better seeds and farming techniques hasn’t reached all parts of the world yet, says San Diego State’s Seiver. But much of the progress from the Green Revolution came from government-sponsored nonprofit organizations, entities that will probably see reduced funding as nations fret about debt.
As prices rise and hunger grows, people start to think of Thomas Malthus, the early 19th-century scholar who proposed that eventually, the world population will exceed the Earth’s ability to feed everyone. That point hasn’t been reached, Seiver says. When food shortages loom, Malthusians come out of the woodwork, he says: “I’m a food optimist. We’re capable of feeding people with better seed, reduced waste and improved technology. But it’s a long, slow process.”
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