Brian Shactman warned us: food prices are expected to rise sharply.
True.
JPMorgan analyst Charles Grom has stated that the Food at Home Consumer Price Index (CPI) increased in September for the fifth consecutive month, which indicates that retail food prices will continue to rise.
While it is obvious that food retailers, like any other business, want to squeeze as many pennies from their customers as they can, I believe that there are two fundamental reasons behind the food price hike: supply and demand.
Firstly, global food supplies have been decreasing due to natural disasters and increased biofuel productions. Pakistan’s flood, China’s drought, and Canada’s adverse weather this year have all halted agricultural productions and destructed crops. Moreover, Russia’s export ban on grains, in response to a drought that ruined nearly 20% of its crops, has further depressed global food supply.
Since the beginning of time, humans have had to fight with other humans and animals for scarce food sources. Nowadays, there’s a new player on the field: biofuel. Countries are ramping up biofuel production in an effort to combat global warming and reduce their reliance on foreign oil – thus far ethanol production alone has increased by 16.2% in 2010. This means that more soybeans and corns are being used to feed biofuel plants rather than people. We might be hungry one day, but hey, at least we’ll have cleaner air to breath.
Secondly, global food demand has been increasing due to population growth and the attractiveness of the commodities market. It is estimated that 200,000 people are added to the world food demand every day. Not only are there more and more stomachs to fill, but these stomachs prefer more meat (I guess they don’t care much about global warming). Statistics show that meat consumption has doubled since 1961 and is expected to double again by 2050. As a result, more livestock is raised in order to meet higher consumption needs, which adds to the food demand for crops – our food is eating our food.
Moreover, the commodities market has become very attractive in recent years because of economic uncertainties and a weaker dollar. When market uncertainties are high, investors withdraw from the riskier stock market and choose to invest in safer assets, such as commodities, instead. Furthermore, many commodities are priced using the USD. When the dollar depreciates, these commodities become cheaper for foreign investors to buy. The increase in the demand of commodities caused by these two factors is reflected through the record high commodity prices: the price of live cattle has increased by 14% year-to-date, wheat by 29%, corn by 37%, and coffee by 38%.
A simple supply and demand graph shows that either a decrease in supply or an increase in demand will cause an increase market equilibrium price. But when both occur simultaneously, as in the case of food, this increase is greatly amplified.
Many people have already started waving red flags and calling this a “food crisis”. A USAToday poll shows that 73% of American consumers are concerned about rising food prices. If you’re one of them, here is my advice:
Stop.
It is an unfortunate reality that food price increases have caused starvation and social unrest in many third-world nations. However, if you are Joe or Jane Doe living in a developed country like America, increase in food prices will not affect you, at least not in the short term, for three main reasons.
The first is that American consumers’ demand for food is inelastic, which means that price changes don’t greatly affect the amount of food purchased. This is because food is a necessity – we need food to live. If prices go up, people will spend less on luxury goods so they have more to spend on food. Another reason for the inelasticity of food demand is that Americans spend less than 10% of their income on food. Even if food prices grow by a few percentage points, this fraction will still remain relatively small. For the average American, therefore, food is not a big purchase decision since it has such a small impact on our disposable incomes.
Good ol’ American capitalism is the second reason why food price increases shouldn’t freak you out. In a capitalist market, grocery stores, restaurants, and other food retailers get to decide upon the prices they charge their customers. They have great incentives to keep prices low compared to their competitors, in order to attract customers (unless the retailer offers a product which no one else does). Therefore, even when prices of ingredients have gone up, food retailers are often reluctant to pass this increase onto their customers for fear of losing business, especially during this period of economic recovery, when everyone is pinching pennies. Plus, don’t worry, they won’t gang up on us and raise prices in unison; there are laws against that.
The last reason, and the one we can most rely on, is the “oh-so generous” American government. The National Inflation Association reported that “food stamp usage in the US has now increased for 14 consecutive months. There are 39.4 million Americans now using food stamps, up 22.4% from last year. The US government is now paying out more to Americans in benefits than it collects in taxes.” If Washington coughed up over $182 billion to bailout AIG, it sure is not going to let its citizens starve.
But Americans shouldn’t stop caring just because we’re off the hook – food security is a serious problem in many other parts of the world today. Starvation and social unrest caused by rising food prices have become common in developing countries such as Egypt, Haiti, Mexico, Morocco, Nepal, and Yemen, where there are no capitalistic market structures and stable governments in place. Food is also subject to elastic demands in these countries, as people must spend nearly 80% of their income in purchasing it. So when food prices go up, they have to choose between food and shelter. Not, as in the States, between food and a new car.
The UN World Food Program and the UN Food and Agriculture Organization have already taken crisis response, supply response, and policy support actions in response to global food security issues. Americans can help by donating to one of the food crisis related organizations. But most importantly, don’t take our full stomachs for granted – before throwing away the leftovers next time, remember that there are starving children in Africa.
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