30 May 2008
Multiple Factors Drive Up Global Food Prices
Scholar predicts moderate price decrease later this year
Washington -- The price of rice has more than tripled since early 2006, while prices for wheat, corn and soybeans have more than doubled, triggering food riots and threatening to plunge more than 100 million people into deeper hunger and poverty.
Charles Hanrahan, a senior specialist in agricultural policy at the Congressional Research Service (CRS), sees five factors driving up the price of food.
The first is weather, with droughts in Australia and Eastern Europe and poor weather in Canada, Western Europe and Ukraine resulting in reduced supplies of grain.
"As a result of adverse weather conditions, global stocks of corn, wheat and soybeans are at historically low levels," Hanrahan said in an interview with America.gov. His findings are contained in a CRS report for Congress, Rising Food Prices and Global Food Needs: The U.S. Response.
Battling its worst drought in a century, Australia has seen its rice production drop by 98 percent of the pre-drought level. As for wheat, Australia produces up to 25 million tons in a good year, most of which is exported. Historically, it is the second largest wheat exporter after the United States. Australian wheat production fell to less than 10 million tons in 2006 but recovered to 13 million tons in 2007, about 40 percent below its five-year average, according to the Australian Bureau of Agricultural and Resource Economics.
Hanrahan said it is unclear whether the abnormal growing conditions are a one-time occurrence or part of long-term climate change.
Export restrictions introduced in countries around the world -- but especially in Asian rice-producing countries -- also contribute to the current problems.
"Some countries have introduced grain export restrictions to augment domestic supplies and hopefully contain the effects of high prices on their own consumers," Hanrahan said. "However, such measures exacerbate the food-supply situation in importing countries."
India has imposed tight restrictions on non-basmati rice exports, and Vietnam banned exports of rice. Thailand, the world's biggest rice exporter, is expected to export a record amount this year as prices rise to unprecedented levels. The price of Thai rice has tripled since January and now stands above $1,000 a ton.
The third factor Hanrahan cited is rising oil and energy prices that have affected all levels of the food production and marketing chain, from fertilizer costs to harvesting, transporting and processing food.
In 2007, when the cost of oil averaged $72 per barrel, more than half of every dollar the United States provided in food aid was consumed by transportation costs. In 2008, transportation costs will surge much higher, following the trend of oil and gas prices. The price of fertilizer has risen steeply, in some cases doubling between October 2007 and April 2008.
"Oil prices are not likely to fall much in the medium term," Hanrahan said. "That will affect the cost of producing and marketing food in every respect."
The fourth factor -- higher incomes in emerging markets like China and India -- has resulted in strong demand for food commodities, meat and processed foods and higher prices in world markets.
"Both [countries] are increasing their consumption of meat, and they need corn and other feed grains. That's a long-term, underlying structural factor in the demand for commodities that will not change radically," Hanrahan said. It takes 7 kilos of grain to produce 1 kilo of meat. China, once a major grain exporter, has become an importer of grain.
The final factor is the increased demand for biofuels, which has reduced the availability of agricultural products for food and feed use.
U.S. government subsidies for ethanol production, which uses corn as a feedstock, have prompted many U.S. farmers to switch their production from food use to biofuel use. The U.S. Department of Agriculture reports that 23 percent of the corn crops went into ethanol production in 2006-2007 and predicts the figure will rise to 50 percent in 2007-2008.
"Some think that the competition between crops for food and crops for fuel will affect food supply and prices for years into the future," Hanrahan said. "This issue is hotly debated right now."
In April, World Bank President Robert Zoellick said the food situation is getting worse by the day in many developing countries, where the poor spend up to 75 percent of their income on food. He warned that 33 nations are in danger of social unrest because of the rising cost of food.
Hanrahan said the price of wheat has dropped by roughly 30 percent in the past month and the price of rice will decline in the near future.
"Prices will come down, but they will be higher than they were a year or two years ago" because of long-term structural changes, Hanrahan said.
