Economics Q&A: What factors help to explain rising food prices?

Global food prices have risen on average by more than 135% over the last 5 years. While the price of food has been highly volatile, with a spike during 2008, there is clearly a trend pattern of a long term rise. This can be attributed to various root causes, both demand and supply side in nature.

In terms of demand side causes, it has been suggested that global population growth may be a cause of the long term rise in food prices. According to the International Food Policy Research Institute, over past years global food production has been increasing at around 1 to 2% per year, while population has been increasing at approximately 4%. The theory of global population outgrowing global food production has been in existence for many years, with the idea being first developed by British demographer Thomas Malthus. The theory is based on the fact that global population grows exponentially, while food production grows proportionately. This constant increase in demand for food would account for an underlying increase in the global price of food.

As well as global population growth, another potential cause of the long term trend increase in global food prices is the development of the Asian economies over the past two decades. For much of this period, the economies of the Asian Tigers and China have experienced growth rates of around 10%. This has led to increases in wealth among the population of these countries and so a gradual change in diet towards more resource intensive foods, such as meat. Foods such as meat use up large amounts of grain, in the form of animal feed, to be produced and so contribute to increased food demand.

One factor that has had both demand and supply side effects on global food prices has been the introduction of biofuel subsidies in the US and EU in recent years. This has been particularly significant in the US, where government subsidies for ethanol production have prompted many farmers to switch to the production of biofuels. The primary crop used in the biofuel industry is maize, 23% of which was used for ethanol in 2006/2007. One way that biofuels increase the price of food is by increasing demand for grains, such as maize. The other effect of biofuels is to change the use of agricultural land, which becomes dominated by maize production, as this is most profitable for farmers. This reduces the supply of other foods and so raises their prices. While biofuels may not account for the rise of food prices over many decades, it certainly accounts for the trend rise over the period shown in the graph.

Another supply side factor that has led to the long term rise in global food prices is the decline of international stock levels. These have declined gradually since the mid-1990s, with cereal stocks declining most significantly. Food reserves are believed to be at their lowest level in 35 years, and have declined at an average rate of 3.4% per year since 1995. The decline in food stocks has been due to a faster pace of food growth and increasing ease of importation, resulting in countries favouring “just in time” inventory management in order to reduce holding costs.

Felix Tracey