Why the era of cheap food is over

Corn, milk, bread, and other farm products hit record high prices in 2006 – and will likely keep rising in 2008.

Food prices worldwide hit record highs in 2006, and all the signs are that they will go on rising this year, and for the foreseeable future. The era of cheap food, the experts say, is over and we are going to have to get used to it. This is easier said than done for millions around the world, as evidenced by protests in Mexico over the cost of corn tortillas, and in Italy last September about the price of (wheat) pasta. Staff writer Peter Ford looks at why.

What is behind the increases in food prices?

Certainly not bad harvests. Although a drought hit the traditionally bountiful Australian wheat harvest this past year, world cereal harvests hit 2.1 billion metric tons, a record production level, according to the UN Food and Agriculture Organization (FAO).

Two major trends have been pushing prices up faster than they have risen for more than 30 years. One is that increasingly prosperous consumers in India and China are not only eating more food but eating more meat. Animals have to be fed (grains, usually) before they are butchered. The other is that more and more crops – from corn to palm nuts – are being used to make biofuels instead of feeding people.

At the same time, the world is drawing down its stockpiles of cereal and dairy products, which makes markets nervous and prices volatile.

The result, says Joachim von Braun, who heads the International Food Policy Research Institute (IFPRI) in Washington, is that "the world food system is in trouble. The situation has not been this much of a concern for 15 years."

How big a factor is the biofuels boom?

It is significant enough for the FAO to be warning about the dangers of turning too much food into fuel, and for the Chinese government, for example, to ban the construction of new refineries that use corn or other basic foods. In fact, earlier this month Beijing announced tax breaks and subsidies to encourage the use of cellulose, sweet sorghum, and cassava (nonfood crops in China) for biofuels.

Some analysts estimate that as much as 30 percent of the US grain crop will go toward producing ethanol this year, a doubling from 2006. IFPRI forecasts that if the world sticks to current biofuel expansion plans, the price of corn will go up 26 percent by 2020, and the price of oilseeds (such as soybean, sunflower, rapeseed) by 18 percent. If governments double efforts to produce this alternative fuel source, corn prices are expected to go up 72 percent and oilseeds by 44 percent in 12 years' time.

Who gets hit hardest? Does anyone benefit?

As usual, it is the poorest people in the world who suffer most, because food takes up a bigger share of their daily shopping bill than it does for richer people. A family in Bangladesh, for example, living on $5 a day, typically spends $3 of that on food. The 50 percent rise in food prices the world has seen in recent years takes a $1.50 chunk – nearly 30 percent – out of the family budget.

Even farmers are not immune. On the whole, small-scale farmers in developing countries buy more food than they sell, so they, too, are net losers. Relatively few peasants have holdings large enough to benefit from price increases.

Big farmers in the rich countries, however, are doing well: US corn farmers have seen the price their crop fetches jump by 50 percent since 2000. Other net food exporters, such as India, Australia, and South Africa, will also do well out of rising prices. Major dairy producers, such as New Zealand, have done well as consumption of milk, yogurt, and cheese rises in Asia. As a result, while property values in New Zealand are generally expected to soften, flat rural land, where cows can graze, is expected to continue to rise in price, according to a survey by Massey University in New Zealand.

Will market forces correct the situation, as farmers switch to the high-earning crops?

Not as quickly as you might expect, though the European Union, the largest food exporter in the world, has suspended a "set-aside" program that had paid its farmers to leave 10 percent of their land fallow (so as to prevent oversupply).

Cereal prices are considered "inelastic," meaning that a 10-percent price increase tends to boost supplies by only one or two percentage points. While prices are high, they are also very volatile at the moment, which scares a lot of farmers off making the investments they would need to switch crops.

At the same time, the food market overlaps with the fuel market. Farmers can now sell their corn, their palm nuts, or their sugar to biodiesel refineries. So the price of palm oil, for example, traditionally the cheapest in Africa, is now set not by the cooking oil market, but by the fuel market.

It will not help that climate change and the accompanying floods and droughts will reduce cereal output in more than 40 developing countries, mainly in Africa, according to recent studies.

Where will food shortages be most acute?

Wherever the underlying trends of rising prices and scarcer supplies are compounded by special problems. Sometimes they are natural disasters, such as the cyclone and flooding that hit Bangladesh last November, wiping out many people's stocks of food. Sometimes they are man-made, as in the Democratic Republic of Congo, where continuing civil conflict and mismanagement disrupt the market, or in Zimbabwe, where inflation of more than 7,000 percent and a crumbling economy are threatening people already short of food.

"The hot spots of food risks will be where high prices combine with shocks from the weather or political crises,", says Dr. von Braun. "These are recipes for disaster."

What effect will high prices have on hunger-prevention programs?

A big one says the World Food Program (WFP), the UN agency in charge of emergency food aid, which reported last year that food aid flows had reached their lowest levels since 1973.

Food prices "are an incredible concern for us at the moment" says WFP spokesman Robin Lodge. "The same dollars don't buy the same amount of food as they used to," and donations to the agency are flat.

The WFP has been making a big effort to buy food from countries as near as possible to crisis zones, to cut transport costs, and in 2007 it had 15 million fewer people to feed than in 2006 because there were fewer major emergencies.

"But we are now about as tight as we can get, so unless donations go up there is no doubt about it, we will have to reconsider who we are feeding and the rations" says Mr. Lodge. "There is no other way around it."

Many food aid organizations are trying to buy more food locally. The FAO is reportedly working on a program to offer poor farmers vouchers for seeds and fertilizer to help them adapt to changing climate conditions.