Food For Thought Drives Markets

Everyone eats food to survive; billions of people around the globe work in agriculture and its related industries. Food prices are important for everyone and, in some cases, they’re a matter of life and death.

There are many variables and conditions affecting food prices. Patrick Westhoff recently published a book: The Economics of Food: How Feeding And Fueling The Planet Affects Food Prices.


He explains in the book many of the complex factors influencing food prices.

Westhoff notes the prices we pay at the supermarket depend on everything from the weather to the cost of oil and the types of fuel we put in our cars. Population explosion in regions of the world, such as Africa, China and India, also affect prices we pay here in the United States. He believes these dynamics should be used by our legislators and food producers to set prices and determine how best to feed the planet.

For years, food prices did not get much attention. From 1991 to 2006, U.S. consumer prices increased 2.5 percent per year, slightly less than half the inflation rate, according to government reports. Crop and livestock prices also varied but without real change.

Things changed in 2007 and 2008, when food prices took center stage. Front page headlines and published reports offered gloom-and-doom and the end of cheap food as we knew it. The Economist published “The End of Cheap Food” as one of its cover stories.

The U.S. Consumer Price Index rose 4 percent in 2007, the largest increase since 1990. In 2008, the food inflation rate increased a whopping 5.5 percent, according to the U.S. Food and Drug Administration.
The surge in basic crops, such as corn and wheat, soared and was even more dramatic. Corn prices more than tripled between late 2005 and 2008. Prices for wheat, rice, soybeans, and many other foods also spiked.

This rise in food prices was a concern in the United States but a crisis for many Third World developing countries. The average family of four spent $8,671 for food in 2007, according to the U.S. Bureau of Labor Statistics. Rising food prices made it harder for families to make ends meet.

Average families in poorer countries may spend more than half of their disposable income on food. This forced many families to choose between eating less healthy foods or sacrificing other necessities.
The Food and Agriculture Organization of the United Nations estimates that millions of people were added to the hunger rolls between 2007 and 2008, leaving 915 million people malnourished around the world. Current economic conditions surely pushed that number to over a billion people by the end of 2009.

Just as many people began fretting about higher food prices and the possibility of permanence, prices moved downward. Hedge funds and speculation had a lot to do with this sudden drop. Traders from around the world used futures to make or hedge bets about future food prices and other commodities.

Wheat future price reached a peak by March 2008, corn in June, and soybeans in July. By October 2008, wheat and corn futures had declined by 50 percent, and soybeans had dropped nearly the same amount, according to the FDA. After peaking in June 2008, the price index fell by a third within the next six months, according to officials.

So what happened? After years of stagnation, why did food prices explode and then suddenly collapse? Was this a short-lived crisis or would higher food prices and their consequences be the norm of the future?

Journalists, politicians, and economists have tried to explain these rapid changes in food prices. Some have produced well-reasoned analysis that carefully identify and weigh contributing factors involved in this complex model. Others have tried to reduce the situation to a small sound-bite, often to make a biased or political point. A lot of information is available, but it’s not easy to sort it out and be objective.

Part of the reason is that increasing amounts of corn, sugar, vegetable oils, and animal fats are used to make biofuels which can be used to power automobiles and trucks. The role of biofuels as a contributor to increasing food prices has been highly controversial.

Some have laid some or most of the blame for higher food prices on the growth of biofuel production. The more grain, vegetable, and animal products used to produce biofuels, the less is available to feed people. This phenomenon has often been quoted by World Food Bank economists who suggested biofuel production accounted for between 70 percent and 75 percent of food price increases.

On the other side of the argument, biofuel defenders point out that rising cost of foods is not related or minimal. They note the percentage of crops to produce fuels is very small, and farmers can easily increase production to make up the difference.

Former U.S. Secretary of Agriculture Ed Schafer noted that increased corn-based ethanol production only
accounted for about 3 percent in the increase in global food prices. The actual impact of biofuels on food prices was almost certainly higher than biofuel proponents would like to acknowledge, but less than biofuel opponents claim.

There’s no getting around the fact that food production in this country and around the world, for that matter, is controlled by big business, lobbyists, and government. The extent to which external factors, like weather and even oil production, affect food pricing remains highly debated.

But one point is certain: The United States is the bread basket of the world.

We believe our government officials and farmers should take whatever steps are necessary to reduce our dependency on oil. In the long run, we believe increasing agricultural production will help improve our geopolitical position and economic standing.

This post is courtesy of TechMan who tracks trends and issues across many areas affecting business, industry and technology.