The Facts Behind Food Prices
Drought, flooding and freezing reduce supply, which can cause dramatic price increases in essential crops. The 2012 U.S. drought, which is the most widespread in more than half a century, is expected to negatively impact the production of key grains like corn and soybeans and has resulted in record prices in those commodities.
- Global demand
A growing middle-class in China and India means increased demand for meat and grains. The U.N. estimates 50 percent more food will need to be produced by 2030 to meet growing global demand with world population expected to reach 9 billion by 2040.
- Biofuel policy
Due to U.S. mandates, 40.6 percent of the corn crop - or 5 billion bushels - are used for ethanol, diminishing supply for other uses to its lowest level in 15 years.
- Limited farmland
Farmland is being lost at an alarming rate due to development and other factors; at the same time, food prices increase as more farmland is devoted to non-food items.
- Macroeconomic factors
A strong U.S. dollar, relative to European and other currencies, has a dramatic effect on all commodity prices. The economic woes in Europe and slowing growth in China have played a significant role in 2012 commodity markets.
- Government policy
Government policies, such as tariffs to support domestic production, reduce competition, limit supplies available for international trade and impact prices; Russia’s ban on wheat exports reduced global trade supplies by 15 million metric tons in 2010/11.
Diseases and infestations cause shortages in grains and livestock, which reduce food supply; on average, roughly 35 percent of global crop production falls prey to diseases and pests.
- Energy costs
High oil prices drive up the costs of bringing food to market; these costs are passed along to consumers.
- Geopolitical conflicts
Political unrest can disrupt productivity, impacting supply and commodity pricing; during 2012, wheat prices spiked as a direct result of protests in Egypt, one of the world’s biggest wheat importers.
- Declining grain reserves
Grain stocks-to-usage ratios are expected to be at record low levels again in 2012, meaning grain inventories are decreasing globally as we use more grains to meet rising demand.