Food : A Precious Commodity?

The price of food seems to be getting increasingly higher all over the world. It is actually impossible to say by how much the price of food will rise, but one thing does seem quite clear and that is that the price of food may rise quite sharply over the next few years, but no one knows for definite by how much.

Increasingly the predictions are growing ever more pessimistic. People are suggesting that the price of wheat and of beef will actually rise by 40% over the next five years, possible even sooner. Recent indications have also said that rice will rise by around 30%.

Since many people who live in poorer countries are dependent on rice and wheat for the staples of their diet, the amount of people who will be living without enough money to feed themselves is likely to explode.

However, the rising price of food will not just impact on the poorer countries. Everyone will start to feel the pinch and anyone who drives (price of gasoline) will feel the pinch just that little bit more. And if you own a house and have a mortgage, then again, you will feel that pinch just a bit sharper. If you have a credit card, then you will also feel the effects of the rising price of food, just that little bit more. If you drive an automobile of any kind, have a mortgage and a credit card, then life is going to get a lot more expensive, so it really will hit everyone.

Why are food prices rising ?

1n 2007 the price of wheat rose from $200 to over $400 a ton. In fact it did not take a year for this to happen it took from May until September. This sudden increase was to take many by surprise and ended up shaking the world out of its complacency. Were food prices about to go through the roof and how would this impact on economies all over the world? After all, if food prices start to go up, then it is reasonable to think that inflation may follow. Once inflation follows, then we will be faced with a situation where countries start to feel that a recession is in the air. Once recession hits, then it is likely to hit everywhere, since food prices are something that affect every single country.

Suddenly people, including many leading economists and financial gurus started to panic and this panic has continued right through to 2008. Indeed if anything, it seems to be getting worse.

So, what is causing these massive hikes in food prices and what is being done to stop them from rising, indeed, can the rises even be slowed down, let alone stopped?

Well part of the problem is that in real terms we are emerging from a period where we had extremely low food prices. In the period 1974-2004 the real price of food actually fell by around 75%, but in the period 2004-2008, food prices have actually risen by just about 75%.

Most experts believe that there are a number of factors that underlie the rise that we have seen in food prices. As is so often when anything increases in price, India and China are being blamed for increased demand for products. Historically, these countries have eaten quite a lot of rice and grains. However, now they want to eat the same kind of food that people in Western countries eat, such as fish, meat, dairy products and an increased number of vegetables. In addition many of the middle classes in these countries are no longer eating rice as their staple dish but instead they are proving just how well affluent there are by eating pasta dishes, which are derived from wheat.

This has meant that globally there is an increased demand for wheat and also a huge increase in the demand for meat. In China meat consumption per head has doubled in the period 1990- 2005 and what is more it is thought that this level of consumption will continue to rise for some time in future.

One of the other a main factors to be taken into account when looking at the rising price of food is the fact that oil prices are at an all-time high and in February 2008, the price of oil rose by 19% in that month alone.
This has two effects, first of all it is more expensive to transport food and so the transport companies have to pass on the costs to their customers, who are usually the supermarkets. The supermarkets then pass the costs on to their customers, who are the regular guys, who end up paying in all sorts of different ways for the increase in the price of oil.

Farmers also find that they have increased costs on the farm. Tractors and farm machinery all cost more to run when oil prices are high and so they pass on the cost when they can, and so the supermarkets once again pass on the high cost to the consumer.

Secondly, people start to look for different ways of creating fuel and recently it has become very profitable to divert food crops such as maize, into the making of biofuels. This actually diverts food away from the food chain and so again, there is a knock-on effect and less food is available, so it gets to be more expensive. Sometimes this reason can seem a little harsh, if food is being diverted to make fuel, then surely it would be reasonable to think that the price of oil would come down, because there is more bio-fuel on the market. But it just doesn't seem to work out that way, which is a poor consolation for the consumer, who just ends up paying more, yet again.

There is also a human hand at work in all of this, since people have jumped on the bandwagon and decided to use wheat and other products as a way of making some money and using food stuffs as a commodity that they can speculate with. So they will buy food to store and then sell it again when the price goes up, unfortunately this means that there is a lot of food simply being stockpiled and it will then be entered onto the market, when it actually has a quite a short shelf life and so it is not of the best quality. The stockpiling also keeps the price artificially high, since demand exceeds supply in the market place. Obviously this does not work with regard to items that have a very short shelf life in the first place, such as meat or eggs. It is only relevant for goods that can be stored for a long time. Wheat can often be stored for a long time, which makes it a perfect commodity for stockpiling.

Climate has also affected food prices. Australia is one of the world's biggest wheat producers and yet it has been blighted by a drought since 2002. Although rain did come in 2008, it will take at least a couple of years for the market to recover. There have also been quite bad flooding in Mozambique as well as large parts of West Africa and this has again impacted on food production throughout these areas. Given that Mozambique and West Africa are still developing countries and they do not have a great deal of reserves, and nor do they have sufficient money to be able to buy in a lot of food, the situation has hit them quite hard.

Will food prices continue to rise?

Experts tend to be divided on this issue, with some saying that food prices may stabilise, but they are unlikely to fall dramatically. Other experts are much more pessimistic and say that if countries continue to divert food away from the food chain, in order to make bio fuels, then it is likely that the price of maize will rise by 72%.

Global warming is also mentioned as being a potential catalyst that will cause food prices to rise by something like 30%-40%, however these projections are for cereals and the price of meat is only expected to rise by something like 20%.

However, the issue of global warming is an issue that is unknown to a large extent, there is no real way of knowing how much it will affect food production. It is easy to make projections, but it is very hard to know whether or not these are actually accurate. To some extent this will simply be a case of waiting to see what happens.

Biofuel production could also be altered so that it does not impact as much on the food chain, through trying to use crops such as grass as well as agricultural waste. This would reduce the amount of food being diverted away from
the food chain and should alleviate serious price rises, particularly with regard to maize.

It seems unlikely that the price of oil will fall dramatically and therefore there will be a knock-on effect with regard to the price of food and this situation is likely to continue for some time.

In addition, there is little indication that the consumers within India and China will be willing to relinquish their newly adopted Western diet and reduce consumption; if anything demand will probably grow steadily and they will consume even more. There is nothing that Western countries are able to do about this, unless people in the West are also willing to relinquish some aspects of their diet and this seems highly improbable.

Thus it would seem likely that food prices will not fall and if the price of oil continues to remain as it is currently, or even rises throughout 2008, then the price of food will continue to rise and unless demand falls, these rises could be significantly higher than even the gloomiest estimates of 2007.

Effect of high food prices

In Western developed countries, when food prices are high everyone has to tighten their belts and live a little more frugally, in order to accommodate the rising price of food. For some people, who are on the edges of poverty, high food prices will hit them hardest, because they spend more of their income on food on a pro rata basis than wealthier people, who have more disposable income.

For people who are already short of food, the situation will become much worse. Food aid is already reduced in terms of how much food people can actually buy with the money that is donated as food aid. If prices continue to rise then people in the developed countries will be unable to give as much aid or relief to people in the poorer countries, it is almost as if they are being hit twice.

Food riots have already taken place in 2007 and 2008. In Mexico, food and riots took place in December 07 after tortilla prices had actually gone up so much, that they had effectively quadrupled in just a few months.

Indonesian people rioted in January 08 due to the high price of soybeans.

Rioters in Burkina Faso attacked government offices, as well as some shops in February 08.

There have also been instances of civil unrest that are directly linked to the price of food, in the countries of Morocco, Uzbekistan, Yemen and Mauritania. It is likely that this kind of unrest may escalate unless food prices can be brought under control, particularly in countries where they already face significant levels of hardship.

Can anything be done to alleviate the situation?

Some experts reckon that the best way this situation can be remedied, is actually through the rather old-fashioned means of growing more food to ensure that there is enough to go around and to keep the prices down, because demand will not outstrip supply.

In other words this may actually present a golden opportunity for farmers or for countries where there is land that can be used for agriculture. So South Africa is now looking to increase its agricultural activities and productivity by around 8%.

Zambia and Malawi are also keen to increase the amount of food that they produce, which will result in more food becoming available, particularly if other countries follow suit and start to use up any bits of land, for food production.

The only significant problem with this is that it will take some time to produce enough food to make substantial difference. Crops that are planted this year may take a year or two to come to harvest and if the land has not been used for farming for some time, then it will also require the addition of nutrients and minerals, in order to maximise productivity. Whilst Mother Nature may provide us with sufficient food to feed us, it simply does not happen overnight and takes a long time to come to fruition. So, this will not cut the price of food in the next week or so.

Some proponents of genetically modified food feel that this is the only way that food prices can actually be stabilised. Genetically modified food is regarded as being acceptable within the States, but in Europe and in the UK, there is a widespread resistance to using genetically modified food and politicians may well find that there is a lot of resistance to it being introduced into the food chain on a widespread basis.

The African continent may find that it has no choice but to use crops that are genetically modified and as a result are more resistant to drought and less prone to some pests than the standard non-modified crops.

Is the future really bleak for food?

The future in terms of food prices really does not have a rosy glow around it, in fact, even the most optimistic fortune teller would be hard pressed to put a positive spin on this one.

The future does look quite topsy turvy when it comes to food prices and it is unlikely that things are going to get much better in the near future.

Perhaps we will even have a situation where governments in countries are encouraging their citizens to plant more and more crops and become less reliant on products that are bought from the shops. People may also have to rethink their diets a little and cut back on meat and dairy products. Ultimately, although these suggestions may seem a little zany now, if we were in the year 2005, we would think it complete folly to have prices that are as high as they actually are today. So, who knows, these predictions, may actually come true.

However, on a more serious note, there is some important issues to consider and the rising oil prices combined with the rising price of food, does lend itself to economies becoming much more vulnerable to inflation and perhaps recession on a global scale, the likes of which we have not see before. This in itself is cause for concern.