The End of Cheap Food?
High Cost of Commodities Will Continue to Hit Developing World Hardest
By Mary Kane
04/23/2008
| 9 Comments
A sharp spike in prices for wheat, corn, rice and other staples has sparked riots in Mexico and Egypt, marches by hungry children in Yemen and the spectre of starving people in Haiti turning to mud pies for sustenance. This growing unrest is forcing the global community to focus on the causes of higher food costs and what can be done. But it's also raising the troubling possibility that cheap prices for food may be gone for good, an economic relic of the the past.
That scenario would be disastrous for the progress of fighting poverty in poor countries - and it would threaten to halt a long period of rising living standards in the United States tied directly to the inexpensive cost of food.
"Don't look now, but the good times may have just stopped rolling," the economist Paul Krugman wrote in his New York Times column. The Economist was more strident: "The era of cheap food is over," it declared. World Bank President Robert Zoellick, reaching back to policies created during the Great Depression for inspiration to address food inflation, is pushing a "New Deal" for global food policy, aimed at aiding impoverished countries with income support and help in producing crops.
The gloom-and-doom outlooks are prompted by rising prices for commodities, which started increasing steadily in 2001 before suddenly soaring recently. Wheat prices have gone up by 181 percent over the past three years, according to the World Bank; food prices around the globe have risen by 83 percent during the same period. In March, rice prices hit a 19-year high. Corn prices recently rose from $2.50 a bushel three years ago to $6, for the first time. Zoellick has predicted a sustained period of higher food costs, saying he expects prices to remain elevated through next year and stay above 2004 levels for at least the next seven years.
The causes are many. India and China have growing populations and are becoming more prosperous; more people can now afford to eat more meat, and the demand for animal feed has grown. In the U.S. and Europe, a boom in biofuel as alternative energy is diverting considerable amounts of corn from the market. A severe drought in Australia has contributed to a 25-year low in supplies. Some also blame speculation in the commodity markets for sharp swings in prices and availability.
While plenty of people are worried about the end of cheap food, it's not clear yet whether that will happen, said David Orden, senior research fellow with the International Food Policy Research Institute. Things like the weak dollar becoming stronger, crop shortfalls easing, energy prices stabilizing and strong growth in the world economy are all factors that could affect the availability of food, he said, and no one's sure how they will play out. "We just don't know yet," Orden said. "Before this bump in food prices started, people were not predicting it."
What has become clear is that in a short time, soaring food costs have shaken some long-held assumptions about food and fuel, especially in the U.S.
Food has been cheap in America for nearly 60 years, and Americans set aside less of their incomes for food than any other country in the world, devoting just 11 percent of disposable income to it, compared to double that percentage in Europe. Keeping food costs low has been one of the great economic achievements of the last century. The low food costs, combined with rising incomes, "have been two of the primary sources of prosperity for American consumers," said John Urbanchuck, an agriculture industry analyst for LECG, a global consulting firm.
Until now, Americans had the luxury of worrying about food due to its abundance. Concerns have centered on childhood obesity and an epidemic of diabetes. But new problems with food are already surfacing, as rising prices begin showing up at the grocery store. More expensive corn means people pay more for eggs and poultry, and still higher meat and milk prices are on the horizon. Record high oil prices are adding to price pressures, since transporting food costs more.
If prices stay high for a long time, the poor will be hit the hardest, since they spend the largest percentage of their incomes on food. Efforts to reduce hunger, like food stamps and free and reduced lunch programs, will become more costly, said Otto Doering, a professor of agricultural economics at Purdue University in Indiana. Asking taxpayers to pay more for them won't exactly be politically popular, since food prices could also take a greater bite out of middle-class budgets. And paying more for food will mean having less to spend on things like big-screen television sets and iPods, putting a dent in the kind of consumer spending that has kept the economy growing for the past two decades.
Consumers won't be the only ones feeling the squeeze. Hog producers in the Midwest expect to lose hundreds of millions of dollars in just the next six months due to corn price hikes, Doering said.
It could get far worse. Another "hidden issue" is the scarcity of land still available for farming, he said. In the past, the United States had plenty of farmland to provide more crops as food demands grew. But land is finite, and after all these years, we're beginning to run short, Doering said. "For the first time in our history, we're pushing up against the edge in terms of quality land," Doering said. "We're in a somewhat fixed box."
Because of all this, Doering said it's not clear whether the U.S. can keep food prices low. "It's a whole new ballgame," he stated.
The United States has endured temporary price bumps before. A spike in commodities in the early 1970s was due mainly to bad weather around the world, and to huge and secretive Russian grain purchases. In 1995-96, food inflation stemmed from a Midwestern drought, global demand for U.S. feed grains and speculation. In both cases, prices settled back down again.
This time around, the biofuel boom is also complicating the question of whether prices will revert. Some one-third of the U.S. corn crop now is devoted to ethanol production, its growth due to a combination of high oil prices and generous government subsidies. When corn prices were lower a few years ago, ethanol was seen as a popular energy alternative. Now it's a target.
Zoellick, the World Bank president, made headlines for blaming biofuels for recent price hikes, saying earlier this month that biofuels are a major factor in the world's added demand for food. Biofuel mania, or speculating in commodities by hedge fund and traders betting on corn prices, was also responsible for shortages and price increases, he said.
His remarks added to an already simmering debate. Last summer Foreign Affairs magazine published "How Biofuels Starve the Poor," which reiterated that sentiment, noting that filling the 25-gallon tank of a sports utility vehicle with pure ethanol required 450 pounds of corn, or enough calories for one person for a year.
At some point, American policy-makers are going to have to decide whether they want to live with an "expensive food policy" that requires continuing to produce large percentages of corn crops for biofuel and enduring higher prices for other foods, said Bruce Babcock, an Iowa State University economist.
The food debate will eventually break down into two camps: Those who believe supply and demand are the problem, and that the world can't produce enough to meet the needs of growing economies; and those who blame ethanol production. In the end, Babcock predicts, Washington will continue to support ethanol production in the near term, before imposing caps on its production.
But the future for food prices will still remain uncertain, because the global market is so complex. "I don't think we've ever been where we are right now," Babcock said.
Should prices stay high, the effect will be felt most keenly in developing countries, as the recent food riots have shown. Impoverished families now pay 50 percent to 80 percent of their incomes for food. Continuing high prices for oil and corn threaten to undo any gains in reducing poverty made over the past decade, Zoellick said.
Josette Sheeran, head of the U.N.'s World Food Program, told The Economist that the effects of higher food prices in poor countries will be devastating:
“For the middle classes, it means cutting out medical care. For those on $2 a day, it means cutting out meat and taking the children out of school. For those on $1 a day, it means cutting out meat and vegetables and eating only cereals. And for those on 50 cents a day, it means total disaster.”
It wasn't supposed to be this way. The promise of globalization was that it could lift living standards for everyone. But if the world's hungry still can't be fed because food is no longer cheap, it's an empty promise.
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© 2007 The Washington Independent
Comments:
Posted 04/23/2008 09:41am with
Yet another exhibit of government meddling in the market leading to obvious (for some of us) consequences. Sit up and bookmark this. Refer to it often the next time you hear anybody in the gov’t. telling you that it has a “solution” to a “problem.”
The gov’t. meddled in energy production, then tried to fix their fix with another wrong-headed fix. I wonder what the fix to the fix to the fix will be? Certainly anything but letting the market determine a solution.
Posted 04/23/2008 10:40am with
Yeah, the government stopped meddling in the loan market and looked what happened. Wall Street has been pushing for the reduction in regulations for years, and they have been getting their way. Capitalism is good, but only if its kept inline. The very nature of people is what makes letting the markets control everything a time bomb. We seem to forget that fact oh so quickly though. The last time major regulations were put into place was the 70’s and before that the 30’s. I know these politicians study history, but the bribes (not directly, but effectively) from lobbyists can make a person change their values very quickly. That is just human nature, and that is why regulations are important.
Posted 04/23/2008 02:37pm with
The gov’t. is more than responsible for what is going on in the loan market. The do-gooders told the banks and mortgage firms that if they didn’t start making loans to those who had no business getting them, that they would be dragged before congress and called racists. So, they gave out the bad loans—at the direction of those coveted “regulators.” So, you’re solution is….MORE GOV’T MEDDLING!
Oddly enough, the Hillary ‘08 web page had a link to her proud proclamations of how she and Billy helped the financially inept get home mortgages. After this whole mess broke, she pulled it from her page. But, she’s the first to point fingers. She was shocked, SHOCKED to see foreclosures go through the roof!
Capitalism doesn’t need to be kept in line, corrupt people have to be kept in line. We have laws for the corrupt, but when liberals get their hands on the markets, it spells disaster every time, because they truly believe that “capitalism has to be kept in line.”
Posted 04/23/2008 07:22pm with
mclaren,
Capitalism is GREAT if it is supported by a respectable and accountable court system to enforce laws and to resolve disputes, and if the actors in the system are themselves accountable. The only way human beings have learned to hold people accountable is to have regulations/laws that can be timely enforced by some governing authority. It has to paint the double yellow lines on the highways and hire and control the police, figuratively and actually. If you don’t consider such government enforced accountability a problem, then I’m with you. Otherwise, you are whistling in the dark. There are about one fifth to one third of folks who don’t give a fig for anyone but themselves and will violate laws and worse to get their way if they think they can get away with it. Ask anyone who studies people. This is too large a group to leave to their own devices when it comes to business practices. Otherwise you simply have Adam Smith’s invisible hand showing us its middle finger. The government set the table with the Fed and keeping rates too low for too long, but the Federal Government impeded state mortgage regulation enforcement in the recent mortgage fiasco. The reason they picked corn-ethanol is because it could help them get votes from farm states. That’s a failure to be accountable to the whole system, which is part of the problem, but they way you appear to be viewing it you would toss out government entirely simply because you don’t want to spend the time needed to supervise it.
I also believe that people are smarter when they work together. Government was supposed to be something that facilitated that greater intelligence and larger successful activities than individuals could do by themselves. It has worked in the past. I don’t know if you realize that the US government enabled cross national railroads and interstate highways, took men to the moon and enabled the creation of the first atomic weapons, and created the potential for the backbone of the internet. Possibly in your view these were terrible things. These things could not have been done without the government setting the table and providing funding. At least not most of it in my lifetime.
Posted 04/23/2008 11:49pm with
Many years ago the elite said they didn’t believe the little people should be able to do the things they could and Reagan , Bush Sr. and finally Bush Jr. has put the clamps on the little people and not they can’t.
Doesn’t is seem funny that since Bush/Cheney stole the office of presidency every thing has been destroyed in our country , democracy , our constitution & bill of rights , treason and torture is ok for Bush/Cheney’s administration , our military has been destroyed and we are hiring criminals and foreign citizens , our president has become a dictator and can do anything he wishes and our democrats approve of his powers , Bush can sign bills into law without the approval of the senate and congress or place a statement of a bill voted into law saying he will not obey it.
Our jobs , manufacturing plants , security , manufacturing of our military equipment has been outsourced. Bush has printed some much new money for his folly that how in the h… can anyone believe that the dollar will buy anything.
Our democrats like the way Bush and republicans create policies and run our country so much they are getting falling over each other to get in line , to sign all of their bills which they introduce.
How in the h… did we elect so many spineless , gutless personal into office on our democratic ticket.
Posted 04/24/2008 03:55am with
OK. Let me see… We let the market decide health care in this country and 45 million people cannot afford health care and those with “pre-existing” conditions don’t even qualify for health care. This affects the bottom line of manufacturing companies like the automobile companies competing against the rest of the world with their government sponsored health care systems which can afford to sell cheaper products and pushing our costs up… and up… Which makes American labor more expensive, so companies relocate to other countries or ship more jobs overseas to protect their bottom line. Yup, the “free market” systems works alright…. FOR OUR COMPETITORS!
Posted 04/24/2008 06:50am with
So McLaren – Which are you? A speculator or a hedge fund manager?
Posted 04/24/2008 06:04pm with
“A spike in commodities in the early 1970s was due mainly to bad weather around the world, and to huge and secretive Russian grain purchases. In 1995-96, food inflation stemmed from a Midwestern drought, global demand for U.S. feed grains and speculation. In both cases, prices settled back down again.”
good post! I’m glad the article addressed this. I remember that spike in the 70’s. I was just a kid, but I remember it well. Food prices seemed to double and triple (depending on what one was purchasing). Two other causes for that mid-70’s spike not mentioned in this paragraph are 1) a multi-month teamsters strike (causing a bread shortage, and in turn, a sharp rise in flour, yeast, salt, etc. – the basic ingredients needed to bake bread from scratch), and an oil crisis caused by OPEC halting production, causing gas shortages and rapidly rising oil prices. What the article doesn’t mention is the spike immediately following WW2. That one was much worse than the 70’s/90’s spikes. I’m optimistic that prices will stabilize in a few years as they always have before (and as the article states in that last sentence).
We’ll get through it. Americans are resilient, but it will be a tight squeeze and a tough ride for us middle classers, and even tougher for poor folks until then.
Posted 06/15/2008 05:08pm with
Not with John McCain as our leader.
Find a better plan than the 3R outline below! I dare you.
Progressive Candidate John McCain comes through for America with his 3R economic plan. In the aura of Theodore Roosevelt, McCain’s plan just makes sense.
1. RETHINK: America must rethink the global views on what America is capable of in our current state of technology, engineering and the demands that face the world.
“RETHINK” in terms of re-action means to set forth this plan.
Most Americans know where the USA falls short in the ways of manufacturing and valuable jobs.
It’s time to meet the change of global demands with Made in USA quality and a new American workforce. Oddly enough, the framework is ready and waiting for this plan and active participation. The Progressive attitude of John McCain to get things done will resurrect America.
2. REFORM: America must rise to these demands and compete aggressively in a global economy. We must demand higher quality products and less restricted trade routes for Made in USA components.
“RE-FORM” is simple to comprehend as through John McCain’s Progressive attitudes, the USA will reform our manufacturing and hit it full steam ahead!
Made in USA has always meant highest quality products at moderate prices. The difference today is, we save loose change with Imported Chinese junk products, but few high paying jobs exist to do anything except buy the cheaper foreign-made products.
3. REINVENT: America and Americans must reinvent themselves to reach and maintain these standards and by sheer American ingenuity, control the world’s marketplace in the competitive manner, as we have always been proud to rule. Can you hear Theodore Roosevelt shouting this?
“RE-INVENT” is the exciting part of McCain’s 3R plan.
Americans in need of a future and without the desire, funding or free time to spend 2 to 8 years in college can go back to a re-invented manufacturing education. McCain’s formula allows these new students, young and old, to be paid a moderate paycheck while learning their new skills and leadership roles in hands on classrooms! Without costing taxpayers or the US government additional funds, we can literally change the face of America and the world.
Learning the skills required in order to become the American driving force behind new USA manufacturing boom, many Americans will also gain the skills to become the CEOs and leaders of their own USA Mfg arenas. Leading a group of people who love their new lifestyle is not difficult and Americans have been proving American ingenuity and leadership since Theodore Roosevelt’s Progressive Republican era.
Initial estimates of 1 in 5 students will go on to begin his or her own company and drive even more Americans into a viable lifestyle with real jobs, real benefits and a retirement to look forward to. Many students will combine forces and create successful joint ventures.
America has the means to follow through with John McCain’s 3R plan, ready and in place across the USA. The buildings we need sit vacant for the most part. America has millions of people screaming for new and improved jobs.
Senator McCain has provided the new guard for Social Security, the promise of retirement and the dreams that can be realized by Americans who would otherwise be lost or at the mercy of a dying workforce. This is the new workforce for American’s future.
By assuming leases on abandoned stores and factories across America with MC-3R schools and mini-manufacturing training centers, the USA made products can be sold and support the stores. Building owners write off the loss in taxes over a few years!
Although the thousands of new businesses manufacturing USA Made products is exciting enough, the real excitement comes from the massive amount of additional jobs that will be created to provide the new housing, new buildings, new parks, shopping, grocery stores, schools, government outlets and so much more.
The Key PROBLEM with the housing slump and the huge crude oil buy-out is not from greedy developers or greedy oil companies, but from the desire to locate and invest in the era’s best investments. Housing was #1 until the investment funds were pulled and crude oil took its place as a commodity. McCain will get us out of the mess that threatens the world’s economy.
These three R’s will be accomplished by the McCain express and through wealthy American entrepreneurs who were once able to invest in America’s manufacturing capabilities but have since fallen into investments that have caused catastrophic world economy failure.
McCain’s Progressive nature embodies Theodore Roosevelt more than any other US presidential candidate in history since.
We need John McCain to lead our nation.