Why do food prices increase?
On his blog, Jordan Schwartz, World Bank lead economist for sustainable development in Latin America and the Caribbean, mentioned several factors that are driving the price increase: speculation in commodity markets, the booming demand from Asia for feed grains and land use switching out from food crops to biofuels, among others.
There is growing consensus that food prices have increased due to fundamental shifts in global supply and demand. A variety of forces contribute to rising food prices: high energy prices, increased income, climate change and the increased production of biofuel. Income and per capita consumption in developing countries has increased; consequently, demand has also risen. Biofuel policies adopted in developed countries also explain the growth in demand.
Furthermore, the food supply has not increased sufficiently at a time when grain reserves are declining and land and water availability for food production has decreased. Changes in food supply and demand have been accompanied by predictable effects in terms of pricing and have been further affected by the rise in the cost of non-renewable resources. In light of the above, the combination of factors driving up food prices has led to a growing consensus that this increase is a structural rather than a cyclical phenomenon.
Today’s high food prices have few precedents. Only in the early 1970s were higher spikes recorded in real prices of grains such as wheat and maize. Food price inflation tends to be accompanied by hikes in energy prices and reduced liquidity in the grain market, such as in the current situation. Grain reserves are at their lowest level in the past 30 years, after the meager wheat harvests of several large-scale producers.
While the region as a whole is a net food exporter, increased food prices negatively affect income, nutrition and health of poor consumers. Even in countries with solid agricultural systems, most people buy their food and thus suffer the consequences of sustained price increases. High-priced food reduces the real income of the most vulnerable populations, with grave consequences for their health and nutrition. Moreover, the rise in food prices and the different trade patterns can combine to generate negative impacts even for food-exporting countries.
Logistic problems drive up food prices
In many Latin American and Caribbean countries, logistic and transport costs have more of an impact than customs duties on the price of commercial trade. The World Bank estimates that logistic expenses account for between 16% and 26% of GDP, and between 18% and 32% of the value of the commodities, compared with about 9% of GDP and commodity value in the countries of the Organization for Economic Cooperation and Development (OECD). In the case of Central American processed goods, the internal logistic burden increases the cost of food commodities with higher unit values by 8% to 15%.
Beginning in 2000, bilateral and regional free trade agreements reduced customs duties worldwide. Nevertheless, freight costs have more than doubled. For large-volume commodities of relatively low value, such as grains and edible oils, shipping and freight costs can increase the final price to the consumer by 30% to 50%.
Food commodities entering a Caribbean or Central American country often are subject to multiple delays, unnecessary direct costs and damages that ultimately hurt consumers. According to the World Bank’s Logistic Performance Index, customs clearance is particularly deficient in the Caribbean, where it normally takes from three to five days (compared with less than a day in Chile and three days in Latin America as a whole). Moreover, in several countries of the two sub-regions, imports take much longer to reach the broker after unloading, particularly in Costa Rica, Haiti, Jamaica and Panama.
According to Food Price Volatility, a Growing Concern, weather conditions are a leading cause of the July surge in food prices. The drought in the United States – the world’s largest exporter of maize and soybeans – resulted in vast damages to those summer crops. The lack of rain in Russia, the Ukraine and Kazakhstan has contributed to projected wheat production losses.
The abrupt food price increases turned favorable price prospects for the year upside down. World Bank experts do not currently foresee a repeat of 2008; however, negative factors – such as exporters pursuing panic policies, a severe El Nino, disappointing southern hemisphere crops, or strong increases in energy prices – could cause significant further grain prices hikes such as those experienced four years ago.