The world food crisis

| August 12, 2013

Not only Australia is affected by rising food prices. Professor Kevin Parton from the Institute for Land, Water and Society describes causes and effects of the current situation and offers solutions to a global problem.

Food prices around the world are high. This is an inconvenience for the average consumer in Australia. In many parts of the developing world the high prices force millions of people to the edge of starvation. This is because they have to spend a large proportion of their meagre income on food just to survive. A 50 percent increase in food prices for a family that spends 50 percent of its income on food is a massive cost. This is the world food crisis.

The reason why we have such high food prices is fundamentally a matter of supply and demand. Supplies are short relative to demand.

On the supply side there have been poor grain harvests caused by abnormal weather conditions. The drought across Australia was one of these abnormal conditions.

On the demand side, the world population is still growing. Also several large population countries, such as China and India, have had significant increases in overall income. The newly affluent in these countries are switching their food preferences from grain staples towards meat and milk. This has led to the diversion of grains from food into animal feeds, causing grain prices for the poor to rise further. Such diversion is an inefficient way to achieve the required overall level of human nutrition.

Another demand-side influence, particularly in the US is the increase in energy prices. As crude oil prices have risen, ethanol as a fuel for cars has become more competitive. The US government has subsidised farmers to grow maize for biofuel, and this has resulted in less maize available for food. In some circumstances it has also resulted in lower production of wheat and soybeans as maize for biofuel has been grown instead.

As a flow-on effect, higher energy prices have pushed up the costs of producing food because fertilizer and fuel for running farm equipment both cost more.

A more controversial demand-side consideration is the way in which financial capital in the US has flowed into commodity futures markets over the last ten years. Some analysts claim that by using a technique called “index speculation,” the hedge fund managers have produced a continuing upward demand for commodity futures, and this has led to further upward pressure on the price of the commodity itself.

While in Australia we may grumble about high food prices, for most of us it is not the crippling burden that it is for poorer households in the developing world. For countries such as the Philippines, which normally imports about 1 million tonnes of rice, even finding enough supplies is proving a challenge. For countries which are at even lower levels of income, including many in Africa which are net cereals importers, the impact at the household level is devastating. This is because a very large proportion of a very small household income is spent on food. The outcome is that families attempt to economise by eating even less food and switching to cheaper food of lower nutritional content.

Unrest in the cities of developing countries has led some governments to attempt to force prices down.  This has the unfortunate effect of reducing farm prices, and hence reducing incentives for farmers to produce more food. An example of this was the 2008 disruption of soybean production in Argentina. The government banned the export of soybeans to keep domestic prices low and as a protest farmers simply halted supplies.

There is a much better way forward. First, the urban poor need to be assisted through income transfers or food distribution programs. Such urban families in the developing world need the purchasing power to reach minimum subsistence levels of food consumption. Second, farmers in developing countries need to be assisted to produce more food through investment in the development of new agricultural technologies.  Developed countries like Australia can provide aid to assist with both of these types of program. Indeed, this is a most opportune time for Australia to move towards the millennium development goal for foreign aid of 0.7% of GDP, from the current level of about 0.4%.

Next, the distorting effects of agricultural trade barriers and agricultural subsidies of the developed countries need to be reduced. As an example, the total US subsidy to its cotton producers is more than 50% of the GDP of Uganda, a developing country cotton producer. Such subsidies have the effect of forcing down returns to producers in the developing world. There is a real need for more effort to be devoted to successfully completing the World Trade Organization negotiations. Again with a little more political will, Australia could lead the world to a brighter trade future by driving the negotiation process forward.

Finally, it needs to be recognised that the subsidised production of biofuels in the US and Europe, in an attempt to keep down energy prices, has spilled over into increased food prices. Clearly there are political trade-offs in these countries. Assisting domestic consumers of fuel comes at the cost of increased prices of food for all, including the poor in the developing world.