More on Food Prices

Tony Karon at Time Magazine sheds some light on growing food prices:

The rapid industrialization of China and India over the past two decades — and the resultant growth of a new middle class fast approaching the size of America's — has driven demand for oil toward the limits of global supply capacity. That has pushed oil prices to levels five times what they were in the mid 1990s, which has also raised pressure on food prices by driving up agricultural costs and by prompting the substitution of biofuel crops for edible ones on scarce farmland. Moreover, those new middle class people are eating a lot better than their parents did — particularly more meat. Producing a single calorie of beef can, by some estimates, require eight or more calories of grain feed, and expanded meat consumption therefore has a multiplier effect on demand for grains. Throw in climate disasters such as the Australian drought and recent rice crop failures, and you have food inflation spiraling so fast that even the U.N. agency created to feed people in emergencies is warning that it lacks the funds to fulfill its mandate.

He also says that:

The reason officials such as Zoellick are sounding the alarm may be that the food crisis, and its attendant political risks, are not likely to be resolved or contained by the laissez-faire operation of capitalism's market forces. Government intervention on behalf of the poor — so out of fashion during globalization's roaring '90s and the current decade — may be about to make a comeback.

This relates to yesterday's post in a couple of ways. First we have a growing demand for an energy source, and it is clear that producers are facing a trade-off between farming for food products or for biofuel products. Plus we have this remark that the market by itself will probably not work this time, since the market being affected is one of basic NEEDS, and not WANTS, when supply is removed from the food market and placed in the biofuel market, driving up food prices. This means that people can't easily substitute away from food because of its high prices since there is no clear or easy to find substitute for food (food is thus price-inelastic). One could substitute between types of food, but apparently it is an industry-wide phenomenon. Therefore, rising food prices are a worrying situation. Keynesian economics is gaining new playing field.

The article also speaks about the riots that this is causing throughout the world. Although this is going on in market based societies, it is also happening in countries that are centrally planned to some extent. The world is interdependent, and no country can fend for itself nowadays. It is interesting to see how growing food prices can affect countries where prices are fixed.

Oh, and Zoellick is the World Bank boss. That's two large multilateral organizations worrying about food prices now.