Reasons for rising food prices

Ok, I realize that this post might seem peculiar at first given that this is a green industry oriented blog. But remember that the supply chain for our products is quite similar to that of perishable foods. Therefore, logically, any supply chain dynamics affecting one industry must also affect the other. Given that premise, let's proceed.

Much attention has been placed in the media on the fact that market prices for major food commodities such as grains and vegetable oils have risen sharply to historic highs of more than 60 percent above levels just 2 years ago. Many factors have contributed to the runup in food commodity prices. Some factors reflect trends of slower growth in production and more rapid growth in demand, which have contributed to a tightening of world balances of grains and oilseeds over the last decade.

Recent factors that have further tightened world markets include increased global demand for biofuels feedstocks and adverse weather conditions in 2006 and 2007 in some major grain and oilseed producing areas.

Other factors that have added to global food commodity price inflation include the declining value of the U.S. dollar, rising energy prices, increasing agricultural costs of production, growing foreign exchange holdings by major food importing countries, and policies adopted recently by some exporting and importing countries to mitigate their own food price inflation.

In assessing prospects for the future, there are a number of uncertainties and concerns:

Global economic growth: If rapid growth continues, particularly in developing countries, it will continue to put upward pressure on food commodity prices through increases in food demand.

Energy prices: If petroleum prices continue to rise, costs of agricultural production will rise, as will the cost of processing, and the cost of transporting products to markets both within a country and exporting to other countries. Continued high petroleum prices will also sustain the global incentives to produce more biofuels.

Biofuels production: In USDA’s 10-year agricultural projections, global growth in biofuels production begins to slow in the next several years and production from grains and oilseeds flattens out in the next half decade. World food commodity prices are not projected to retreat to past levels. However, several years into the future, the underlying long-term trend in rapidly increasing global demand is expected once again to be the primary contributor to future upward pressure on food commodity
prices.

Supply response capacity of the global agricultural production system:
• Cost of inputs: Continued increases in production costs, especially in energy-related costs, will restrain the world’s production response. Higher costs for fertilizer, fuel, and seeds could cause farmers without access to credit to plant less than they otherwise would have, or to shift to crops requiring fewer inputs.

• Additional cropland (quantity and quality): What will be the long-run impact of higher world food commodity prices on the amount of land used to produce the crops? What is the productivity of the land that will be used to increase production?

• Water shortages: How quickly will constraints on the amount of water available for agricultural production become more widespread?

• New seed varieties and use of biotechnology: Will higher food prices encourage some countries to adopt the use of biotechnology, especially genetically modified seed for crops? Will future research focus more on yield-enhancing varieties rather than cost-reducing innovations?

• Biophysical response to climate change: How will climate change affect agricultural production? How will it change temperatures, precipitation, the length of growing seasons, and variability of yields? How, and under what circumstances, will climate change increase and/or reduce production? In affected regions, how difficult will it be for producers to shift to different crops, to adopt new cropping patterns, and to adjust production practices to the new environment?

With such low world stocks of food commodities, food prices are vulnerable to a production shortfall in one or more major production areas. If a significant shortfall occurs this year due to weather or disease, food prices might continue to rise sharply from the current high level.

Although trade flows can mitigate some of these effects, new or existing trade restrictions or barriers can exacerbate price impacts. However, if good crop production conditions exist in the Northern Hemisphere during the next 6 months, food commodity prices could retreat significantly from their current highs.