June 9, 2008

Another Angle to the Food Crisis

by Tim Breitbarth, DC Resident.

If you have been following the news lately, you probably have heard a lot about the global food crisis. Food prices are increasing more rapidly than people’s incomes, making staples such as rice and corn too expensive for many of the world’s poor. The lack of available food has led to protests and riots in some parts of the world. Although food prices are indeed rising, the impact on global poverty may not be as one-sided as the news media suggests.

Before we go any further, let us examine some of the causes of the rise in food prices. It seems as if every analyst has his or her favorite scapegoat – droughts in key agricultural regions, rising demand in China and India, agricultural subsidies in the U.S. and Europe, and the increased production of corn-based ethanol, to name a few. If you excuse the pun, there are kernels of truth in each of these claims, but none of them alone provide a comprehensive explanation. The real answer likely involves the impact of these and other factors on the supply and demand of food.

As with most price phenomena, the global food crisis essentially can be distilled to a case of supply versus demand. The cost of food has increased because the global demand has risen, and the global supply of food has not kept pace. For example, if drought reduces agricultural output while a growing middle class in China and India seeks to buy more of these products, the price will rise. Agricultural and ethanol subsidies impact the supply side of the equation. Because high market prices or subsidies provide financial incentives for farmers to grow certain crops, they will devote a greater percentage of their fields to those crops and a smaller share to others. As a result, prices for the other products rise because supplies have decreased.

While most news stories have focused on consumers, there is a different story to be told for food producers. High prices for agricultural commodities lead to increased income for farmers. Rising food prices may be devastating to the world’s urban poor, but it could be a ticket out of poverty for poor farmers. Of course, a farmer’s level of benefit depends on a host of factors – the percentage of the consumer price that trickles down to the farmer, the cost of producing that particular commodity, and the farmer’s access to local, national and international markets. For example, some farmers could see their newfound profits devoured by rising energy costs, and subsistence farmers would not profit, since, by definition, they are not selling any crops in any market. However, high food prices can be good for the rural poor overall as long they produce more food than they consume.

This observation is not meant to minimize the impact of the food crisis on the world’s poor. Rather, it should help humanize the issues at stake. From our perch in the wealthy nations of the developed world, it can be tempting for us to view “the poor” as a monolithic entity. However, the world is not filled with “the poor” but with poor people who have numerous challenges and priorities. The food crisis is making life more difficult for many poor people in urban areas, but even this crisis can still offer a small measure of relief to some in rural areas.

Tim Breitbarth works at a government organization dedicated to ensuring economic growth in developing countries.


Jonathan said...

Tim -
excellent comments. I am proud to be your brother.


Matt Siemer said...

Hi Tim,

Unfortunately, I'm not your brother. But I was wondering, how much of the global price increase has to do with commodities speculation and a poor stock market? Of all things, a farmer in Missouri was the only one who seemed to know anything about this. Any thoughts?

Timothy said...

Certainly, commodities speculation has had some impact on prices. With commodity prices rising and the stock and real estate markets struggling, commodities are very attractive to investors. That said, I still think the impact of speculation is dwarfed by the larger forces of supply and demand.

Logically, investors typically will not purchase a security as a means of driving up the price of that security. Instead, they will purchase a security that appears to be on the rise already because they can make money with minimal effort. Therefore, it is likely that food prices were rising before speculators ever got involved.

Timothy said...

A column by Robert Samuelson in today's Post basically makes the same point I made about speculation, albeit in a more sophisticated manner.


Matt Siemer said...

Whoa! Thanks, Tim!