Around the world, rising food prices are moving investors, companies, politicians and eaters into action. On Wall Street last week, McDonalds Corporation announced that it expected higher beef prices, sending its stock prices down 2% in one day, despite higher than expected quarterly earnings. In Uganda, riots broke out in downtown Kampala to protest rising food and fuel costs, adding another nation to the roster of those experiencing political turmoil due to higher food costs. And in China, the second largest economy in the world, inflation reached 5.4% in March, a 32 month high, driven mostly by an almost 12% increase in food costs. In the longer term, as shown below, the real price of food, as measured by the UN Food and Agricultural Organization’s Food Price Index, has doubled since 1990.
In last week’s post I made the case that rising food prices pose a serious threat to global and US public health, increasing hunger and food insecurity and obesity and diet-related chronic disease, together the leading causes of illness and death. I argued that reversing the rise in food prices was an urgent public health priority and that developing new approaches to lowering food prices and the gap between the cost of healthier and less healthy food offered the food justice movement an important opportunity to reach new constituencies. This week, I examine how supply and demand factors influence food prices at each of three levels: global, national and local.
For the last three centuries, food has been a global commodity but in the past 50 years the globalization of food has accelerated, with important implications for food prices. Long term influences on food supply—and therefore on prices—are the natural resources available for producing food such as land and water. As the world’s population increases while the supply of arable land and water stays approximately fixed, the world confronts the classic dilemma of constrained supply and growing demand described by Thomas Malthus in 1798.
After World War II, the Green Revolution harnessed technology to increase crop yield and therefore feed more people. In recent years, however, investment in agricultural research and development has declined significantly, leading to less rapid increases in crop yields. In the convoluted logic of the market, as research led to increased productivity and declines in prices, it became less profitable to invest in more research. Now, as population continues to increase, this failure of supply to meet demand leads to increased prices.
In the short term, weather and climate also influence the supply of food. In 2010-11, extreme heat and drought in Russia and Argentina and heavy rains in Australia and Canada led to declines in wheat production, contributing to a 78% increase in the price of wheat. While climate change cannot definitively be implicated in any one crop failure, most scientists agree that climate change contributes to weather extremes which make food supplies more volatile, contributing to swings in prices.Rising energy prices have also contributed to higher food prices since global agribusiness relies heavily on oil for fertilizers, pesticides and transport.
Agricultural operations also affect food supply. Only about half of what is harvested actually reaches the fork so reducing this waste could dramatically increase food supplies and lower prices. Similarly, animal diseases such as avian flu or mad cow disease, now more globalized than ever, can decimate livestock, leading to temporary declines in supply and increases in price.
Corporate practices also affect the global supply of food. International trade agreements, usually shaped by multinational food companies, make it easier for some countries to export food. For example, the North American Free Trade Agreement dramatically increased export of inexpensive processed food from the US to Mexico, leading to changes in Mexican diets—and health. Speculation can also affect food supplies. If future food prices are estimated to be higher than current ones, food producers—or speculators—can hoard food. Last summer, speculators bought up huge supplies of cocoa in hope of profiting on higher prices.
Beginning in the early 1990s, but especially in the last few years, Goldman Sachs, AIG, JP Morgan, and Bear Stearns, among others also involved in the 2008 financial collapse, created commodities funds to attract investors looking to move their money out of the collapsing housing market. By betting that the price of food will continue to rise, these investors hope to profit. Some analysts believe that this speculation contributed to the dramatic food price increases in 2008 and again this year, , although others disagree.
Finally, the concentration of various sectors of the food industry can influence supply and price. When food production is dispersed and highly competitive, many producers compete in part by increasing supply. When the industry is highly concentrated, however, major producers maintain profits by reducing the supply or discouraging new competitors, thus preventing new or cheaper supplies coming to market. Monsanto’s near monopoly on crop seeds illustrates how a few companies can lead to price increases that ripple through the market. As the world food supply depends increasingly on a few crops such as corn, sugar, wheat, soy and rice, produced by a few companies, the potential for constrictions on supply and increases in price grows.
Global demand factors also have an important influence on the food supply and prices. As already noted, increases in the world population require more food to feed more people. Prosperity also increases demand. As more people can spend more on food, demand increases. Many observers consider the growing prosperity in Brazil, Russia, India and China as an important driver of food prices. As people in these and other nations eat more meat, more land is used to grow grain to feed the animals, further reducing the supply of other foods and increasing the price.
Another influence is the growing demand for particular commodities. For example, the rise of biofuels in the last 10 years has increased the market for corn and sugar cane. Moving some of these crops into the energy sector reduces the food supply, increasing prices. Another economic force influencing the demand for food is the depreciation of the dollar. As the dollar falls relative to other currencies, more countries can afford to import food from the United States, an important factor in maintaining demand (and prices) for US crops. The figure below illustrates some of these influences in the period 1996 to 2008.
National and Local Levels
At the national level, many of the same factors operate to influence supply and demand. Public subsidies for some crops (but not others) can increase the supply and reduce the price of subsidized products. In the US for example, the $30-40 billion annual subsidies for corn, sugar and soy have led to falling prices and increased consumption of the processed foods that depend on these industrial food staples, a subject of controversy in the debate on the 2012 Farm Bill. In another domain, federal food assistance programs such as school meal program and the Supplemental Nutritional Assistance Program (SNAP, formerly Food Stamps) and Women, Infants and Children spent almost $95 billion in Fiscal Year 2010, helping to feed many hungry people but also maintaining demand and prices of supported products.
Vertical and horizontal integration of the food industry and concentration within an industry also influences food prices nationally. Some industries make profits by making their products ubiquitous and cheap (think soda, candy and snack foods) while others, usually small producers, develop limited niche markets, which maintain high prices (think of artisanal cheese or ramps) by limiting supply. As noted in last week’s post, the disparity in prices for healthy and unhealthy foods contributes to health inequities.
Public policies that enable food companies to transfer or externalize to consumers and tax payers the harmful consequences of their products (e.g., the cost of treating diabetes) help to keep food prices low but increase long term social costs. Similarly, market power enables companies like Wal-Mart, the world’s largest retail company, to drive tough bargains with its suppliers, allowing lower prices for consumers but keeping down wages of farm and store workers and pushing small local stores out of business.
At the local level, state and municipal economic conditions and policies can also influence prices. In neighborhoods with few food outlets, prices are likely to be higher given the reduced role of competition. One study found that people living in poor neighborhoods pay more for both healthier and less healthy food, showing how food prices can widen health inequalities related to both food insecurity and obesity.
Public subsidies for farmers markets and local community-supported agricultural program can increase the supply of healthy affordable food in low income communities. Conversely, the absence of such public support often serves to limit beneficiaries of these alternatives to better off communities and individuals.
Taxes can also influence the price of food. Some jurisdictions tax junk food and many have proposed taxes on sugar-sweetened beverages, a move so far usually defeated by the soda industry and anti-tax conservatives. Such taxes are presumed to reduce demand by increasing price.
To develop strategies to promote health by lowering the cost of food, especially healthy food, public health officials and food activists will need to identify appropriate targets for action, then develop political strategies to achieve such changes. In the next post, I’ll examine in more detail two possible targets for action: speculation in food and public subsidies for unhealthy food.
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1. Magharebia via flickr
3. Ocean.flynn via flickr
4. Trostle, 2008