Thursday, April 24, 2008

Food Shortages and Prices

Colin Carter and Henry Miller writing in the Orange County Register are discussin rising food prices and how they affect poorer countries more than more prosperous countries.
Price hikes at the supermarket are an inconvenience to consumers in rich countries who are faced with spending more for their milk, eggs, meat and breakfast cereal, but few actually go hungry or are malnourished. In poor countries, however, the doubling of grain prices that has led to an increase in food prices of 60 percent to 70 percent during the past year has been cataclysmic. If a family's income in Africa is a few dollars per day, a grain price shock results in skipped meals and children going hungry.

Food prices have risen relatively faster in poor countries because their populations eat a simpler diet rich in staples – that is, they consume more grains directly, so there are few links in the food-supply chain that can absorb price increases.
So what has cause them, well the United States and Europe have caused a fair share of the damage.
Skyrocketing grain prices are partly due to wrong-headed policy choices in the United States and Europe, where irrational exuberance about biofuels has led to the diversion of vast amounts of cropland from growing food into inefficient fuel production. In December 2007, the U.S. government passed the Energy Independence and Security Act, which raised the mandated volume of renewable fuels (mostly corn-based ethanol) for 2008 from 5.4 billion to 9 billion gallons, a huge increase over a short time. Because the law of supply and demand trumps anything the Congress can produce, we should not be surprised that the price of corn has risen by about 50 percent since December.

A whole bushel of corn yields 2.8 gallons of ethanol, so that to meet the congressional mandates, this year the United States will need to devote more than a quarter of its corn crop to ethanol production. Generous government subsidies for ethanol and mandatory minimum use of so-called "renewable" fuels have removed from the world marketplace a quarter of U.S. corn, which is by far the largest source of this commodity in world markets. Moreover, the price increases caused by politicians' intoxication with corn-derived ethanol has spilled over to wheat and other crops that can substitute for corn.
This is sort of a basic economics question.

There is a finite amount of grains, including corn, wheat, rice, etc., that can be grown in a given year. Therefore the question is really about the allocation of resources amount its particular uses. A bushel of corn can be used to feed people or feed a machine to make ethanol, but not both things. When the allocation of resources is governed by market forces, generally the allocation will be the best balance. But when the govenrment gets involved, by, for example, mandating a certain amount of bio-fuel production, there is a fall-out and that usually means higher prices for someone and there are substantial portions of the world population cannot absorb those prices.

Conflict is inevitable in these conditions, one only hopes that bio-fuel happy governments will come to their senses sooner or later.

No comments: