Food Prices and Policies Economic Implications, Agribusiness, Global Markets, Biofuels, and the Green Revolution

State of the World and Food In 1996, 180 countries at the UN FAO decided to cut hunger by half by Five years later at the first World Food Summit, several delegations noted that developed countries subsidize their farmers by $1billion a day! – The result of such subsidization is a depressing of world prices for poor farmers.

Food Food Price Index, FAO July

State of the World and Food Between 2005-mid 2008, world food prices increased 87 percent. The WFP stated that higher food prices threatens the long-term international food security (WFP, 2008). Food price increases are not new, between 1971 to 1974, world food prices increased nearly 141 percent (IMF, 1996).

Food Food Price Index, FAO July

State of the World and Food After the peak in 2008, food prices fell by nearly 28 percent. Price fluctuations could be attributed to – Shifts in demand and supply of food. In 2009, food prices fell, but in 2010, world food prices rose above the highs of 2008.

Food Food Price Index, FAO July

Demand and Supply Shifts $ Q Demand Supply P1 Q1 S2 Q2 P2

Demand and Supply Shifts $ Q Demand Supply P1 Q1 D2 Q2 P2

Demand and Supply Shifts $ Q Demand Supply P1 Q1

Demand and Supply Shifts $ Q Demand Supply P1 Q1

State of the World and Food Demand Income growth in Asia (India vs. US) Fuel Run on the market Exchange rates Supply Bad weather in Pacific rim Rising petroleum prices Rising petroleum prices Transport, Fertilizer Land Use Government interventions

Fuel Source: Short-Term Energy Outlook - Real Energy Prices, EIA, June 7,

Food and Fuel Runge and Senauer (2007) state, – Biofuels have tied oil and food prices together in ways that could profoundly upset the relationships between food producers, consumers and nations in the years ahead, with potentially devastating implications for both global poverty and food security.

Monthly Food and Fuel Price Indices Food Price Index, FAO July Short-Term Energy Outlook - Real Energy Prices, EIA, June 7,

Food vs. Fuel Debate The World Bank says world maize production increased by 51 million metric tons between 2004 and 2007 Over the same year the consumption of maize used in ethanol increased by 50 million metric tons. Other consumption of maize also increase by 33 million metric tons.

Food vs. Fuel Debate Estimates of the effects of biofuels on food prices are between 10 and 40 percent. Who is hurt? – The diet of consumers in developed nations do not depend as heavily on grains and oilseeds. – However, the diet of consumers in the developing world, depend heavily on grains and oilseeds.

Annual Food Price Indices ( =100) Food Price Index, FAO July

Annual Food Price Indices ( =100) Food Price Index, FAO Sept

Annual Food Price Indices ( =100) Food Price Index, FAO July

Those Hurt According to the World Bank in 2005, 2.56 billion people (47% of the world) lived on less than $2 a day. – Studies suggest that among the world’s poorest, caloric consumption falls 0.5 percent whenever average food prices increase by 1 percent. – According to IFPRI, the number of food-insecure people in the world would increase over 16 million persons for each percentage increase in real prices of staple foods.

Those Hurt According to the World Bank in 2005, 2.56 billion people (47% of the world) lived on less than $2 a day. – The world’s poorest people spend between 50 to 80 percent of household income on food. – Large increases in the prices of staple foods will lead to malnutrition.

Monthly Food Price Indices ( =100) Food Price Index, FAO July

Monthly Food Price Indices ( =100) Food Price Index, FAO July

Monthly Food Price Indices ( =100) Food Price Index, FAO July

Subsidies for Biofuels Historically, biofuels could never be made without subsidies; however, high gas prices and technological improvements are adjusting this picture, slightly.

Subsidies for Biofuels Steenblik (2007) estimates that Australia, Canada, the EU, Switzerland, and the US subsidized biofuels around $11 billion in – In the US alone, corn was subsidized by $8.9 billion in 2005, being dwarfed by tax credits, grants, and government loans. – The US government grants ethanol blenders a tax break of $0.51 per gallon.

Subsidies for Biofuels In 2005, the US mandated the use of 7.5 billion gallons of biofuels by – The US government established Renewable Fuel Standard (RFS), which sets a minimum biofuel use level. – Six billion gallons of ethanol are needed because of the elimination of the fuel additive MTBE.

Subsidies for Biofuels The EU through the Common Agricultural Policy (CAP) supports agricultural production which will help her achieve 5.75 percent of fuel from biofuels by 2010 and 10 percent by 2020.

Subsidies Brazil has supported biofuels since the 1970s through – Incentives, – Technical standards, – Investing in technologies, and – Market promotion. Asian nations are now jumping on the bandwagon.

Prices and Ethanol With the support to the industry demand, ethanol production can pay higher price premiums for corn. – Leading to the substitution of other crops to corn, which will increase other grain prices.

Prices and Ethanol Likewise the higher oil prices, which ethanol is a substitute, will bid up the price for corn. – If oil reaches $80 per barrel, ethanol producers could pay over $5 per bushel. Note corn prices before the price spike were around $2. – If oil falls to $30 per barrel, ethanol is not profitable unless corn is $2 per bushel, which suggests the need for subsidies.

The Future of World Food Prices Westhoff (2010) notes that food prices fluctuate from year to year. Several factors can be linked to the year to year variation in food prices: – Weather – Income – Population – Technology – Energy

Future Scenarios Scenario 1: Food prices will stay in line with overall inflation from lower population and rising income. Scenario 2: Food prices will rise because of increasing demand for meat and biofuel. Scenario 3: Food prices will fall because of slower population growth rates and income increases.