The FAO Food Price Index (FPI) remains at near record-highs, and this at a time when record droughts and calamitous famine threaten the Horn of Africa. Using the latest data from the FAO FPI page, I plot here the FPI time series from 1990-2011.
World food prices are high and have remained so since the beginning of this year, though there have been some pretty dramatic swings between 2008 and now. There is some argument that the real problem for poverty alleviation is actually price volatility and not high prices per se. However, a recent paper in Foreign Affairs by Barrett and Bellemare argues that the problem for the world’s poor is really high prices (a more complete working paper can be found here). I find their arguments quite persuasive. Among these, the authors wryly note “Perhaps not coincidentally, [commentators’ and politicians’] emphasis on tempering price volatility favors the same large farmers who already enjoy tremendous financial support from G-20 governments.”
Newly released data by FAO show that food prices continued to rise, up 3.4% from the last month of 2010. This is yet another record high. Here is a plot based on the FAO data (click to enlarge):
An article in today’s New York Times attributes much of the rise in price to uncertainty over coming harvests. It also notes the four main factors that contribute to increased price: weather, higher demand (from larger population size and greater demand for meat and dairy), smaller yields, and the diversion of food crops to biofuels.
The UN’s Food and Agriculture Organization‘s food price index is at an all-time high, meaning that the food security of millions of people is in jeopardy. In the plot below (click to enlarge), we can see that the FPI currently just exceeds its previous high in June of 2008, when riots over food shortages were widespread. This is something to keep an eye on for the new year.
The 2008 Report of the Millennium Development Goals is out today. Seeing this, along with this editorial piece by The Age‘s economics editor, Tim Colebatch, drives home the key point that the world food crisis is far from over. High food prices may drive 100 million more people into extreme poverty this year, eroding the substantial progress that has been achieved in the eradication of extreme poverty since the MDG were instituted.
Despite the flooding in Iowa earlier this summer, the US is set to harvest its second largest corn crop ever. Good news for the price of food for hungry people? Not really, the USDA expects that 34% of the total corn crop will be used to make ethanol for biofuel. They project a price of $5-6 per bushel for the coming year, up from $4.25 for 2007/08. I can’t help but think that making fuel for SUVs out of food when there are still many poor, hungry people in the world is a bad idea. But what do I know?
There is a new Rice Outlook report from the Economic Research Service of the USDA. I was surprised to see a forecast record harvest for the coming year, given the crazy price movements in rice this year and the dire predictions that were the rule earlier this summer. At Costco in California, they actually rationed the 25 and 50 lb bags for a while, fearing a run on fancy rice (like Jasmine and Basmati). I watched an irate shopper who was trying to buy 12 10 lb bags of rice get told that she couldn’t do it. She nearly lost it.
I plotted a couple of price quote series (for Thailand Grade B and Thailand Super A1 100% Broken).
The plot shows an astounding price increase over the beginning of 2008, nearly tripling the November 2007 price before plummeting again at the end of last month.
It will be interesting to keep an eye on this. As I mentioned in a previous post, nearly three billion of the world’s people rely on rice as a staple crop and most of these people are poor. When the price of rice triples, people go hungry. Roz Naylor has a nice video available on the Woods Institute for the Environment website explaining the food crisis of this spring and how it relates the the expansion of biofuels.
A recent story in The Guardian reports on an unpublished World Bank study that suggests the conversion of food crops to biofuels, and the resulting economic pressures entailed in this process, is responsible for most of the steep price increases in food this year. The World Bank report has not been published, though it was completed in April, and speculation is that the delay is meant to avoid embarrassing the Bush administration, who maintains that biofuels have had only a minor impact on food prices. For example, the report contradicts statements by US Agriculture Secretary Ed Schafer and Energy Secretary Samuel Bodman made in a letter sent to the Senate Energy Committee last month. The World Bank report attributes fully 75% of the increase in food prices to biofuels in contrast to the official US estimates of just 3%.
Biofuel development distorts food markets in three ways, one of them obvious, the other two less so: (1) it diverts grain production for food to the production of biofuels, (2) it creates incentives for farmers to set aside more land for biofuel crop development, and (3) it induces speculation on the commodities market, driving up grain prices.
The results of this report (at least as reported in The Guardian) resonate well with my own intuitions about biofuels. It seems like a very bad idea to me to make fuel for SUVs out of food. It’s all too easy for people in the developing world, where the leading dietary problem is obesity, to forget that a substantial portion of the world (somewhere in the vicinity of 800 million) is still regularly hungry. I remain open to the idea of generating biofuels from organic waste, but the consequences of growing grain and other basic foodstuffs for biofuels on commodity prices, and therefore the price that people pay for food, should be obvious to anyone who has taken an introductory economics class. Price increases with demand and decreases with supply, remember? Given that world population is still growing and that some formerly poor parts of the world are rapidly developing (and therefore increasing their demand for grain both directly and indirectly through increased demand for meat), there is no way that demand for grain as food is going to decrease. This can only mean that increasing crop production for biofuel is bound to decrease supply for food in the absence of large expansions of crop land. Generating demand for biofuels through legislation requiring a certain proportion of biofuel use (as is the case in the EU) or marketing ethanol-burning SUVs as somehow environmentally friendly is similarly going to increase demand for biofuels. This means that prices for grains (and substitutable commodities) are bound to increase. Or am I missing something here?