Around the globe, food prices have soared over the past few years. International prices for the most critical staples -- rice, wheat, and other cereals -- have doubled or tripled. Right on cue, some pundits have been quick to blame the "excesses" of the free market for these price hikes. Are they right?
Let’s first figure out what isn’t behind spiraling food prices.It isn’t farm subsidies, which are so often to blame for the many distortions in world agricultural markets. Widely respected economists Jagdish Bhagwati and Arvind Panagariya, writing in the Financial Times, point out that the farm subsidy reductions contemplated in the global Doha Development Agenda negotiations "would reduce the supply of grains from some countries that subsidize them and increase it from other countries… The net effect on supply would be negative."Subsidies cause overproduction -- and depress prices.
So the recent increase in food prices isn’t caused by subsidies.It’s hard to blame bad weather, let alone climate change. The weather is usually blamed for crop failures that drive up prices, but the UN’s Food and Agriculture Organization is forecasting in its June Food Outlook a bumper crop for cereals. For 2008/2009, the FAO is projecting a 3.8% increase in world cereals production over 2007/2008, which actually set world records. So, there’s more food to go around than ever before…So what is to blame?
Biofuels have been a significant factor, though there’s debate over how much they are affecting food price increases. White House Council of Economic Advisors Chairman Ed Lazear on May 1 explained his view that "ethanol accounts for somewhere between 2 and 3 percent of the overall increase in global food prices. And the reason for that is that ethanol works primarily on corn. It has increased corn prices substantially by about 33 percent.
But corn is only 30 percent of all grain, and grain is only 20 percent of all food. So when you multiply those together and take that into account, you end up with about 2 to 3 percent."But many observers believe this analysis is too sunny. According to an unpublished World Bank report excerpted by Britain’s Guardian newspaper on July 4, the diversion of food crops to create biofuels has caused world food prices to increase by 75%. "Rapid income growth in developing countries has not led to large increases in global grain consumption and was not a major factor responsible for the large price increases," the report said.Even assuming the truth lies somewhere in between 3% and 75%, biofuels appear to be a significant driver of food price increases. Export bans and export taxes are the other main factor.
"To protect domestic consumers from rising world prices, dozens of governments have curbed the export of rice and wheat -- principally Argentina, Brazil, Russia, China, India, Ukraine, Vietnam, Cambodia, Pakistan, Egypt, and Indonesia," explains Swaminathan S. Anklesaria Aiyar of the Cato Institute. Terry Stewart of the law firm Stewart and Stewart recently told the Global Business Dialogue that as many as 31 countries around the globe have imposed export controls on key staples.By prohibiting grain exports or taxing such exports heavily, these governments have caused trade in grains to contract painfully.
"Export controls have reduced the amount of rice and wheat available for world trade," Aiyar explains. "The FAO estimates that world trade in rice will fall from 34.7 million tons in 2007 to 28.7 million tons in 2008, and trade in wheat from 113 million tons to 106 million tons. Actual trade may fall even more, as more and more countries impose export controls. Absent these limitations, it would be inconceivable for trade in grain to contract so sharply after record world harvests."
So the main factors driving food prices higher are trade barriers (export bans and taxes) and ethanol subsidies. It might be nice to just blame the weather, but it’s clear that measures undertaken by governments to mitigate the pain of soaring food prices or diversify energy sources are only making them worse. As Confucius said, bad government is worse than fierce tigers.
July 30, 2008 at 04:38 PM
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