The End of Cheap Food?

High Cost of Commodities Will Continue to Hit Developing World Hardest

By Mary Kane 04/23/2008 | 4 Comments

A sharp spike in prices for wheat, corn, rice and other staples has sparked riots in Mexico and Egypt, marches by hungry children in Yemen and the spectre of starving people in Haiti turning to mud pies for sustenance. This growing unrest is forcing the global community to focus on the causes of higher food costs and what can be done. But it's also raising the troubling possibility that cheap prices for food may be gone for good, an economic relic of the the past.

That scenario would be disastrous for the progress of fighting poverty in poor countries - and it would threaten to halt a long period of rising living standards in the United States tied directly to the inexpensive cost of food.

"Don't look now, but the good times may have just stopped rolling," the economist Paul Krugman wrote in his New York Times column. The Economist was more strident: "The era of cheap food is over," it declared. World Bank President Robert Zoellick, reaching back to policies created during the Great Depression for inspiration to address food inflation, is pushing a "New Deal" for global food policy, aimed at aiding impoverished countries with income support and help in producing crops.

The gloom-and-doom outlooks are prompted by rising prices for commodities, which started increasing steadily in 2001 before suddenly soaring recently. Wheat prices have gone up by 181 percent over the past three years, according to the World Bank; food prices around the globe have risen by 83 percent during the same period. In March, rice prices hit a 19-year high. Corn prices recently rose from $2.50 a bushel three years ago to $6, for the first time. Zoellick has predicted a sustained period of higher food costs, saying he expects prices to remain elevated through next year and stay above 2004 levels for at least the next seven years.

The causes are many. India and China have growing populations and are becoming more prosperous; more people can now afford to eat more meat, and the demand for animal feed has grown. In the U.S. and Europe, a boom in biofuel as alternative energy is diverting considerable amounts of corn from the market. A severe drought in Australia has contributed to a 25-year low in supplies. Some also blame speculation in the commodity markets for sharp swings in prices and availability.

While plenty of people are worried about the end of cheap food, it's not clear yet whether that will happen, said David Orden, senior research fellow with the International Food Policy Research Institute. Things like the weak dollar becoming stronger, crop shortfalls easing, energy prices stabilizing and strong growth in the world economy are all factors that could affect the availability of food, he said, and no one's sure how they will play out. "We just don't know yet," Orden said. "Before this bump in food prices started, people were not predicting it."

What has become clear is that in a short time, soaring food costs have shaken some long-held assumptions about food and fuel, especially in the U.S.

Food has been cheap in America for nearly 60 years, and Americans set aside less of their incomes for food than any other country in the world, devoting just 11 percent of disposable income to it, compared to double that percentage in Europe. Keeping food costs low has been one of the great economic achievements of the last century. The low food costs, combined with rising incomes, "have been two of the primary sources of prosperity for American consumers," said John Urbanchuck, an agriculture industry analyst for LECG, a global consulting firm.

Until now, Americans had the luxury of worrying about food due to its abundance. Concerns have centered on childhood obesity and an epidemic of diabetes. But new problems with food are already surfacing, as rising prices begin showing up at the grocery store. More expensive corn means people pay more for eggs and poultry, and still higher meat and milk prices are on the horizon. Record high oil prices are adding to price pressures, since transporting food costs more.

If prices stay high for a long time, the poor will be hit the hardest, since they spend the largest percentage of their incomes on food. Efforts to reduce hunger, like food stamps and free and reduced lunch programs, will become more costly, said Otto Doering, a professor of agricultural economics at Purdue University in Indiana. Asking taxpayers to pay more for them won't exactly be politically popular, since food prices could also take a greater bite out of middle-class budgets. And paying more for food will mean having less to spend on things like big-screen television sets and iPods, putting a dent in the kind of consumer spending that has kept the economy growing for the past two decades.

Consumers won't be the only ones feeling the squeeze. Hog producers in the Midwest expect to lose hundreds of millions of dollars in just the next six months due to corn price hikes, Doering said.

It could get far worse. Another "hidden issue" is the scarcity of land still available for farming, he said. In the past, the United States had plenty of farmland to provide more crops as food demands grew. But land is finite, and after all these years, we're beginning to run short, Doering said. "For the first time in our history, we're pushing up against the edge in terms of quality land," Doering said. "We're in a somewhat fixed box."

Because of all this, Doering said it's not clear whether the U.S. can keep food prices low. "It's a whole new ballgame," he stated.

The United States has endured temporary price bumps before. A spike in commodities in the early 1970s was due mainly to bad weather around the world, and to huge and secretive Russian grain purchases. In 1995-96, food inflation stemmed from a Midwestern drought, global demand for U.S. feed grains and speculation. In both cases, prices settled back down again.

This time around, the biofuel boom is also complicating the question of whether prices will revert. Some one-third of the U.S. corn crop now is devoted to ethanol production, its growth due to a combination of high oil prices and generous government subsidies. When corn prices were lower a few years ago, ethanol was seen as a popular energy alternative. Now it's a target.

Zoellick, the World Bank president, made headlines for blaming biofuels for recent price hikes, saying earlier this month that biofuels are a major factor in the world's added demand for food. Biofuel mania, or speculating in commodities by hedge fund and traders betting on corn prices, was also responsible for shortages and price increases, he said.

His remarks added to an already simmering debate. Last summer Foreign Affairs magazine published "How Biofuels Starve the Poor," which reiterated that sentiment, noting that filling the 25-gallon tank of a sports utility vehicle with pure ethanol required 450 pounds of corn, or enough calories for one person for a year.

At some point, American policy-makers are going to have to decide whether they want to live with an "expensive food policy" that requires continuing to produce large percentages of corn crops for biofuel and enduring higher prices for other foods, said Bruce Babcock, an Iowa State University economist.

The food debate will eventually break down into two camps: Those who believe supply and demand are the problem, and that the world can't produce enough to meet the needs of growing economies; and those who blame ethanol production. In the end, Babcock predicts, Washington will continue to support ethanol production in the near term, before imposing caps on its production.

But the future for food prices will still remain uncertain, because the global market is so complex. "I don't think we've ever been where we are right now," Babcock said.

Should prices stay high, the effect will be felt most keenly in developing countries, as the recent food riots have shown. Impoverished families now pay 50 percent to 80 percent of their incomes for food. Continuing high prices for oil and corn threaten to undo any gains in reducing poverty made over the past decade, Zoellick said.

Josette Sheeran, head of the U.N.'s World Food Program, told The Economist that the effects of higher food prices in poor countries will be devastating:

“For the middle classes, it means cutting out medical care. For those on $2 a day, it means cutting out meat and taking the children out of school. For those on $1 a day, it means cutting out meat and vegetables and eating only cereals. And for those on 50 cents a day, it means total disaster.”

It wasn't supposed to be this way. The promise of globalization was that it could lift living standards for everyone. But if the world's hungry still can't be fed because food is no longer cheap, it's an empty promise.