The recent months saw an unprecedented increase in food prices. The price of rice, the most common staple in the world, soared by 141% since the beginning of the year, while other staples such as wheat and corn experienced similar price increases as well. How did this sudden spike in prices occur, if there weren’t any natural disaster (except the recent Cyclone Nargis, which happened after the price increase), nor any major crisis that threatened world food supply? This didn’t happen without rhyme or reason. In fact, we believe that a multitude of supply and demand factors, both short-term and long-term, have contributed towards the recent food price increases. An article that gives a clear overview of the current situation of food shortages is attached below, along with our own economic analysis of the issues raised.

Causes behind the price hike:

“Freak weather is a factor. But so are dramatic changes in the global economy, including higher oil prices, lower food reserves and growing consumer demand in China and India.”

The growing appetite of China’s and India’s consumers, following years of rapid economic growth resulting in greater purchasing power, has been frequently cited as the main reason behind the recent food price increases. These consumers are increasingly switching from basic staples such as rice to more luxurious ones such as meat and dairy products. The production of 1kg of beef, for instance, requires much more than 1kg of grain since livestock also need to consume food in order to provide us with their meat. This is known as derived demand, where the demand for grain increases as a result of an increase in demand for meat, eventually leading to higher grain prices.

“Among the driving forces are petroleum prices, which increase the cost of everything from fertilizers to transport to food processing.”

While seemingly unrelated, the increase in oil prices also has a profound impact on food prices. First and foremost, oil constitutes an important component for the production of fertilizers and also the transportation of agricultural products. An increase in oil prices causes the cost of agricultural production and transportation to increase, shifting the supply curve to the left. Also, as a result of higher oil prices, biofuel development projects in many countries are also picking up. Converting more food into fuel further aggravate the situation by decreasing the already-limited food supply.

“But attempts to control prices in one country often have dire effects elsewhere. China's restrictions on wheat flour exports resulted in a price spike in Indonesia this year, according to the FAO. Ukraine and Russia imposed export restrictions on wheat, causing tight supplies and higher prices for importing countries.”

To make matters worse, many governments and organisations adopt economic policies based on self-interest. Grain-exporting countries have already begun to cut exports in order to keep local prices low, while grain-importing countries began hoarding supplies, fearing higher prices and more limited supply in the future. Panic-buying by consumers, as well as speculators expecting prices to rise in the future, causes the demand for grain products to increase tremendously in the short-term. As a result, prices continue to rise at an unprecedented pace.

“The world's poorest nations still harbor the greatest hunger risk. Clashes over bread in Egypt killed at least two people last week, and similar food riots broke out in Burkina Faso and Cameroon this month.”

Most directly-hit are the ones who earn low wages, who are usually the ones to spend the largest proportion of income on foodstuffs. Already, many places in the world have seen strikes and clashes, sometimes fatal, as a result of rising food prices. Since basic staples such as rice, wheat and corn are also basic ingredients for many bakery and noodle products, increase in grain prices causes an almost universal increase in food prices (as seen in the article, even the price of escargot was not spared). In Singapore, import price-push inflation was experienced as a result of that.

Policy options: Free market or government intervention?

“In decades past, farm subsidies and support programs allowed major grain exporting countries to hold large surpluses, which could be tapped during food shortages to keep prices down. But new trade policies have made agricultural production much more responsive to market demands -- putting global food reserves at their lowest in a quarter century.Without reserves, bad weather and poor harvests have a bigger impact on prices.”

Many economists have argued that the best long-term solution to global food shortages is to allow the free market to take its course – allow prices to rise so that farmers will have more incentives to produce more. However, problems might arise if the free market is left on its own. Food, as a basic survival necessity, cannot be allowed to have its price rise too rapidly, as survival of the poor might be threatened. Furthermore, the supply of grain is price inelastic, as the quantity of grain supplied cannot increase overnight following an increase in prices, since farmers also need to take time before their output can meet market demand. These problems seem to point towards the argument that food, as a basic necessity, should be “spared” from the mechanisms of the free market and governments should heavily intervene with the supply and demand for food.

“Economists say that for the short term, government bailouts will have to be part of the answer to keep unrest at a minimum.”

However, long-term, heavy intervention should not be main focus of the government. The recent food scare represents a breakdown of the mechanisms of food supply and demand after years of government intervention. Huge government subsidies on food, coupled with the lack of investments in recent years to boost agricultural productivity, have created a chronic food shortage that hasn’t been discovered until recently. The role of the government, therefore, should be on cushioning the impacts of such price increases. In the short run, governments can choose to adopt a combination of food subsidies and direct financial aid to the poor to ensure their survival. In the long run, however, more things need to be done.

“In the long term, prices are expected to stabilize. Farmers will grow more grain for both fuel and food and eventually bring prices down.”

Firstly, agricultural productivity should be increased by providing farmers with more incentives for increased production (via price increases, gradually). There should also be more investments in developing higher-yield, more pest-resistant grain types. Introducing new technologies to traditional farms in less-developed countries also helps to increase agricultural productivity. The main emphasis of such development projects should be on the least-developed farms in the world since that would yield the greatest returns since the law of diminishing returns has not set in. To quote from the Economist, “it would be easier to boost grain yields in Africa from two tonnes per hectare to four than it would be to raise yields in Europe from eight tonnes to ten”.

Concluding remarks:

The use of short-term price controls, subsidies and exchange rate policies (in the case of Singapore) to cushion the impact of rising food prices, coupled with long-term supply-side policies of increasing agricultural productivity, will hopefully lead to a more painless transition to a new market equilibrium. Let’s all hope that Thomas Malthus was wrong.

ARTICLE
Taken from http://edition.cnn.com/2008/WORLD/americas/03/24/food.ap/index.html
MEXICO CITY, Mexico (AP) -- If you're seeing your grocery bill go up, you're not alone.
Protesters share a loaf of bread in Cairo, Egypt, while demonstrating against high food prices.
From subsistence farmers eating rice in Ecuador to gourmets feasting on escargot in France, consumers worldwide face rising food prices in what analysts call a perfect storm of conditions. Freak weather is a factor. But so are dramatic changes in the global economy, including higher oil prices, lower food reserves and growing consumer demand in China and India.

The world's poorest nations still harbor the greatest hunger risk. Clashes over bread in Egypt killed at least two people last week, and similar food riots broke out in Burkina Faso and Cameroon this month.

But food protests now crop up even in Italy. And while the price of spaghetti has doubled in Haiti, the cost of miso is packing a hit in Japan.

"It's not likely that prices will go back to as low as we're used to," said Abdolreza Abbassian, economist and secretary of the Intergovernmental Group for Grains for the U.N. Food and Agriculture Organization. "Currently if you're in Haiti, unless the government is subsidizing consumers, consumers have no choice but to cut consumption. It's a very brutal scenario, but that's what it is."

No one knows that better than Eugene Thermilon, 30, a Haitian day laborer who can no longer afford pasta to feed his wife and four children since the price nearly doubled to $0.57 a bag. Their only meal on a recent day was two cans of corn grits.

"Their stomachs were not even full," Thermilon said, walking toward his pink concrete house on the precipice of a garbage-filled ravine. By noon the next day, he still had nothing to feed them for dinner.

Their hunger has had a ripple effect. Haitian food vendor Fabiola Duran Estime, 31, has lost so many customers like Thermilon that she had to pull her daughter, Fyva, out of kindergarten because she can't afford the $20 monthly tuition.

Fyva was just beginning to read.

In the long term, prices are expected to stabilize. Farmers will grow more grain for both fuel and food and eventually bring prices down. Already this is happening with wheat, with more crops to be planted in the U.S., Canada and Europe in the coming year.

However, consumers still face at least 10 years of more expensive food, according to preliminary FAO projections.

Among the driving forces are petroleum prices, which increase the cost of everything from fertilizers to transport to food processing. Rising demand for meat and dairy in rapidly developing countries such as China and India is sending up the cost of grain, used for cattle feed, as is the demand for raw materials to make biofuels.

What's rare is that the spikes are hitting all major foods in most countries at once. Food prices rose 4 percent in the U.S. last year, the highest rise since 1990, and are expected to climb as much again this year, according to the U.S. Department of Agriculture.

As of December, 37 countries faced food crises, and 20 had imposed some sort of food-price controls.

For many, it's a disaster. The U.N.'s World Food Program says it's facing a $500 million shortfall in funding this year to feed 89 million needy people. On Monday, it appealed to donor countries to step up contributions, saying its efforts otherwise have to be scaled back.

In Egypt, where bread is up 35 percent and cooking oil 26 percent, the government recently proposed ending food subsidies and replacing them with cash payouts to the needy. But the plan was put on hold after it sparked public uproar.

"A revolution of the hungry is in the offing," said Mohammed el-Askalani of Citizens Against the High Cost of Living, a protest group established to lobby against ending the subsidies.
In China, the price hikes are both a burden and a boon.

Per capita meat consumption has increased 150 percent since 1980, so Zhou Jian decided six months ago to switch from selling auto parts to pork. The price of pork has jumped 58 percent in the past year, yet every morning housewives and domestics still crowd his Shanghai shop, and more customers order choice cuts.

The 26-year-old now earns $4,200 a month, two to three times what he made selling car parts. And it's not just pork. Beef is becoming a weekly indulgence.

"The Chinese middle class is starting to change the traditional thought process of beef as a luxury," said Kevin Timberlake, who manages the U.S.-based Western Cattle Company feedlot in China's Inner Mongolia.

At the same time, increased cost of food staples in China threatens to wreak havoc. Beijing has been selling grain from its reserves to hold down prices, said Jing Ulrich, chairwoman of China equities for JP Morgan.

"But this is not really solving the root cause of the problem," Ulrich said. "The cause of the problem is a supply-demand imbalance. Demand is very strong. Supply is constrained. It is as simple as that."

Chinese Premier Wen Jiabao says fighting inflation from shortages of key foods is a top economic priority. Inflation reached 7.1 percent in January, the highest in 11 years, led by an 18.2 percent jump in food prices.

Meanwhile, record oil prices have boosted the cost of fertilizer and freight for bulk commodities -- up 80 percent in 2007 over 2006. The oil spike has also turned up the pressure for countries to switch to biofuels, which the FAO says will drive up the cost of corn, sugar and soybeans "for many more years to come."

In Japan, the ethanol boom is hitting the country in mayonnaise and miso, two important culinary ingredients, as biofuels production pushes up the price of cooking oil and soybeans.
A two-pound bottle of mayonnaise has risen about 10 percent in two months to as much as 330 yen (nearly $3), said Daishi Inoue, a cook at a Chinese restaurant.

"It's not hurting us much now," he said. "But if prices keep going up, we have no choice but to raise our prices."

Miso Bank, a restaurant in Tokyo's glitzy Ginza district, specializes in food cooked with miso, or soybean paste.

"We expect prices to go up in April all at once," said Miso Bank manager Koichi Oritani. "The hikes would affect our menu. So we plan to order miso in bulk and make changes to the menu."

Italians are feeling the pinch in pasta, with consumer groups staging a one-day strike in September against a food deeply intertwined with national identity. Italians eat an estimated 60 pounds of pasta per capita a year.

The protest was symbolic because Italians typically stock up on pasta, buying multiple packages at a time. But in the next two months pasta consumption dropped 5 percent, said farm lobbyist Rolando Manfredini.

"The situation has gotten even worse," he said.

In decades past, farm subsidies and support programs allowed major grain exporting countries to hold large surpluses, which could be tapped during food shortages to keep prices down. But new trade policies have made agricultural production much more responsive to market demands -- putting global food reserves at their lowest in a quarter century.

Without reserves, bad weather and poor harvests have a bigger impact on prices.

"The market is extremely nervous. With the slightest news about bad weather, the market reacts," said economist Abbassian.

That means that a drought in Australia and flooding in Argentina, two of the world's largest suppliers of industrial milk and butter, sent the price of butter in France soaring 37 percent from 2006 to 2007.

Forty percent of escargot, the snail dish, is butter.

"You can do the calculation yourself," said Romain Chapron, president of Croque Bourgogne, which supplies escargot. "It had a considerable effect. It forced people in our profession to tighten their belts to the maximum."

The same climate crises sparked a 21 percent rise in the cost of milk, which with butter makes another famous French food item -- the croissant. Panavi, a pastry and bread supplier, has raised retail prices of croissants and pain au chocolat by 6 to 15 percent.

Already, there's a lot of suspicion among consumers.

"They don't understand why prices have gone up like this," said Nicole Watelet, general secretary at the Federation of French Bakeries and Pastry Enterprises. "They think that someone is profiting from this. But it's not us. We're paying." Food costs worldwide spiked 23 percent from 2006 to 2007, according to the FAO. Grains went up 42 percent, oils 50 percent and dairy 80 percent.

Economists say that for the short term, government bailouts will have to be part of the answer to keep unrest at a minimum. In recent weeks, rising food prices sparked riots in the West African nations of Burkina Faso, where mobs torched buildings, and Cameroon, where at least four people died.

But attempts to control prices in one country often have dire effects elsewhere. China's restrictions on wheat flour exports resulted in a price spike in Indonesia this year, according to the FAO. Ukraine and Russia imposed export restrictions on wheat, causing tight supplies and higher prices for importing countries. Partly because of the cost of imported wheat, Peru's military has begun eating bread made from potato flour, a native crop.

"We need a response on a large scale, either the regional or international level," said Brian Halweil of the environmental research organization Worldwatch Institute. "All countries are tied enough to the world food markets that this is a global crisis."

Poorer countries can speed up the adjustment by investing in agriculture, experts say. If they do, farmers can turn high prices into an engine for growth.

But in countries like Burkina Faso, the crisis is immediate.

Days after the riots, Pascaline OuÄedraogo wandered the market in the capital, Ouagadougou, looking to buy meat and vegetables. She said a good meal cost 1,000 francs (about $2.35) not long ago. Now she needs twice that.

"The more prices go up, the less there is to meet their needs," she said of her three children, all in secondary school. "You wonder if it's the government or the businesses that are behind the price hikes."

IrÇene Belem, a 25-year-old with twins, struggles to buy milk, which has gone up 57 percent in recent weeks.

"We knew we were poor before," she said, "but now it's worse than poverty."

Kok Wei
Li Hui
Wei Zheng
07S6E