Thursday, June 5, 2008

Why is food so damn expensive?

Unless you live under a rock and subsist on phosphorous or something, you probably know that prices for basic foodstuffs have skyrocketed over the last year and a half. Staple foods, like wheat, rice and corn have doubled in price or even worse. There have been shortages and riots in many places across the world, as people struggle to get what they need. This Economist article from December has a pretty good run-down of the facts.

So, back to Econ 101. What causes a good to rise in price? There are three main possibilities, and in fact, all are at work here:

1. Increased demand. The world's population is increasing, and in much of the Third World, especially in growing economies like China, people are turning more and more toward a Western style diet, high in meat (which is highly inefficient compared to a more tradional Third World diet).

2. Speculation. Speculators believe the price of food will continue to rise, and therefore they bid up prices on the futures markets in the pursuit of short-term profit. They will never take delivery of the food produce they are bidding on, and thus their only goal is to make a little money in the short-term. This has led to calls from various NGOs for increased regulation in these markets.

3. Restricted supply. Much has been made of the bio-fuels industry and how it affects food production. What ethanol subsidies have done is take vast amounts of farmland that used to be used in food production and diverted it to bio-fuel production. Not only is otherwise-edible corn being wasted in this way, but it is also diverting land resources.

It takes nearly as much gasoline to produce this fuel as it purports to save. And the carbon output of ethanol is even higher than regular gasoline by the end of the production process (graph retrieved from Wikipedia):

(click the graph to see it more clearly)

There are other studies that say US ethanol does, in fact, reduce carbon emissions slightly, but the main point is that this is no silver bullet, and many of the bio-fuels listed here do nothing at all to help the environment or reduce the effects of global warming. And at the same time, this industry is starving poor people all across the world.

The US is the world's largest producer of corn, and thus, Bush's ill-advised ethanol initiatives have done the worst harm. But as the graph shows they are not the only country investing in this red herring. Canada has also put billions of dollars into ethanol subsidies.

So food prices are rising because of increased demand, future market speculators, and reduced production resulting largely from the bio-fuels industry. There's nothing we can do about the first reason, other than to change our diets, but the latter two are fixable.

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