Rising Prices on the Menu

A huge part of soaring food prices is due to temporary factors but the main reasons reflect irreversible structural changes in the economy.

• Turbulent weather upsets prices. The stimuli for most price surges are temporary, weather-related shocks like droughts, wildfires, and La Niña. Damage to harvests result to supply shortages and prices increase both in local and international markets. These shortages are further intensified by factors like the shortfall size, export restrictions, and protectionist trade policies that keep local prices stable at the expense of global prices.
• People are developing expensive tastes. Consumers in developing and emerging markets are getting richer and they start eating more high-protein food and less grain. This increases the demand – and consequently the price – for scarce agricultural resources (i.e. more land for cattle grazing and more crops for animal feed).
• Food depends on fuel. Higher oil prices drive food prices up because fuel runs agricultural equipment like mills, tractors, and delivery trucks. In addition, heightening demand for biofuel has increased the demand for crops like corn, cane sugar, and palm kernels.
• Yielding more crops is costly. Farmland (as well as water and energy) is limited. Because of this, farmers would want to grow crops that would yield more profit. In addition, as overall demand has been constantly increasing for all crops, farmers are compelled to utilize idle land. To encourage them to do this, prices need to increase.
• Stock levels amplify shortages. When stock levels are low relative to consumption, protection for future shortages recede. Inventory holders then hesitate to release their stocks at any given price. This amplifies the effect of price surges.

 Poor, emerging and developing economies are hit harder by higher food prices because:

• Income is spent mostly on food. Food expenses represent a large share of overall budget in these countries. When food prices rise, these families will be able to afford less food.
• The risk of increased core inflation is high. When people expect food prices to go up continuously in the future, they begin demanding higher wages. This leads to increased core inflation. This is more significant in emerging and developing countries because their food expenditure shares are large (i.e. they are very sensitive to higher food prices) and their monetary policy credibility remains low.

Source:

Helbling, Thomas, Shaun Roache, “Rising Prices on the Menu: Higher Food Prices may be Here to Stay.” Finance & Development, March 2011, pp. 24-27.