Why food prices are rising across the Globe?


FACTORS:

  •  Rough weather:

            Among the cyclical factors that have been at work are the random weather conditions that have reduced the harvests in key producing countries. World wheat production declined in 2006 because of a 60% reduction of output in drought-hit Australia. Flooding in part of south Asia and pest inflation and cold weather in Vietnam reduced harvests as well in 2007, particularly for rice.

  •  Depreciating currencies:

            Depreciation of the US dollar against major Asian rice exporters had the effect of raising dollar prices. The steep decline of the US dollar against all major currencies in the past one year and its declining to record lows have contributed to increase in prices of soft commodities including wheat, whose prices are denominated in US dollars.

  •  Hoarding of Food grains:

            Precautionary demand for food stocks in many countries is contributing to food grain price increases. Public food grain agencies and private traders in many countries are replenishing their depleted stocks  in wake of a surge in international prices of wheat and rice. There have been many instances of raid on private traders who are accused of hoarding food grains to push up prices and create opportunities for making windfall profits in the domestic markets. Such options to contain price hike are difficult to implement and have increased prices in the domestic markets of many countries including that of Bangladesh and the Philippines.

  •  Policy Response:

            Sustained policy responses (export bans, price floors, etc) of key rice exporting countries include China, Pakistan, Vietnam and India have increased price volatility and uncertainty in the international rice market. Export bans and price controls imposed by some countries have reduced supplies in the world rice markets and increased uncertainty over future rice supplies, contributing significantly to the surge in rice prices especially since the end of 2007. Although Kazakhstan, Uzbekistan and Ukraine also imposed similar bans on wheat exports, the latter two have withdrawn the bans recently. Nonetheless this contributed to volatility in the wheat prices. Lack of efficient logistics system and infrastructure for food grain marketing and distribution in several countries tightened the market further as experienced by Afghanistan, Bangladesh, Nepal, Philippines and Tajikistan.

  •  Rising Energy Cost:

            Rising energy prices and energy intensity of the agricultural sector have increased the cost of critical inputs like fertiliser, fuel and power. World energy prices have increased rapidly on recent years. Both irrigation and fertilisers are critical inputs to the production of high-yielding varieties of food grains, and these are energy intensive.

  •  Bio-fuel:

            The diversion of cereal use from food to produce alternative fuel (bio-fuel) is increasing as the oil prices become higher. Since 2000, cereal use for food and feed has increased by 4 and 7% respectively, while cereal demand for industrial purposes like bio-fuel has jumped by more than 25%.

  •  Diversion Of Land:

            Land is also being diverted to urban/industrial uses and competition for scarce freshwater resources between agriculture, industry and household has adversely affected the supply as societies undergo urbanization and industrialisation.  Water scarcity will be increasing challenging for China and India, where irrigation water consumption as a total share of consumption is going to decline by 5-10% by 2050 as compared to 2000.

  • Weak Policies:

            Policy interventions such as food grain support prices, input subsidies, involvement of public agencies in food grain imports, marketing and distribution tend to be ineffective over medium term and inhibit supply increases. Such subsidies have contributed to wasteful use of water resources, degradation of land and imbalance in fertiliser use.

ANALYSIS:

            Well so what’s with all this? Looking at all the factors which have contributed to the existing food problems and by how much is difficult to gauge. Looking at the hoarding aspect, one can easily conclude that it can affect the  prices locally in a given area but that to affect the global market would not be such a nice thing to blame for. The diversion of land has also contributed to some extent in the total decline in the supplies. But is it so?

            One study shows that farmers across the world have produced a record 2.3 billion tonnes of grain in 2007, up 4% on the previous year. Since 1961 the world’s cereal output has tripled, while the population has only doubled. Stocks are their lowest value in 30 years but the bottomline is that there is enough food produced in the world to feed the population. 

            Aftermath of food crisis, the prices have gone up further because of policies of certain governments imposing ban on export of grains. The recent news of rice and wheat exporting countries to form a union like the OPEC will only lead to speculations driving food prices and would ultimately  lead to spiralling up of the global food grain prices. (everyone knows how speculations lead to driving up global oil prices, imagine the same about food!!)

            Amidst all this where is the climate phenomenon. Going by a recent report, it was evident that global warming has something to do with the low yields and supply side problems in food grains. The inter governmental panel on climatic changes (IPCC) suggested that due to rising global temperature, leads to a condition where over the years the precipitation level declines. Moreover there is moisture evaporation from the soil which is so very important for a good yield.

             The need for alternative sources of energy to combat the greenhouse emitting fuels is pushing the demand for grains for alternatives like bio-fuels. This has increased the demands or should we say the diversion of cereals for production has reduced the supply, tough line to draw. In general it has affected the supply. Looking at the brighter side it does bring down some other factors which lead to low yields. The rising energy costs are certainly driving the price of food grains upwards.

SOLUTION:

Well in this globalised world there is only one thing which could lead to stable prices, i.e. awareness among developed governments to accept development of the third world countries. Increase amount of trade between countries and interdependence would help stabilize the situation. Refraining of governments from forming bodies (like the OPEC) and letting speculations drive important commodities for sustainment of human lives. The cause of environment changes should be well addressed and agricultural productions should be made modern and scientific to meet the requirements of bio-fuels as well. Modern agriculture practices should be implemented and developed nations should come forward to support the major producers with research and technological data to help sustain the growth over the period of time. This is only going to reduce global food problems and also lead to sustainable growth. At the microcosm governments should try preventing activities like hoarding as well. Thus these steps if taken could greatly help in reduction of the global food problems and carve out a path for free trade and sustainable co-existence.

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