Research Proposal: Food Prices

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¶ … food prices over the past few years has been the result of several factors. Supply tightness increases volatility, so the high prices of the past few years indicate significant supply tightness in key variables. One of those variables is the supply of food itself. The supply of food has been adversely affected by demand for other agricultural cash crops. In the United States, for example, there has been a dramatic increase in demand for corn and soybeans. The spike in demand derives from increased biofuel demand. Corn and soybeans are converted into ethanol, which has been extensively promoted as a "green" solution to fossil fuel consumption. This demand reduces the supply of corn and soybeans available not only for food consumption, but for animal feed as well. The result is an increase in meat prices. Further, this increased demand for corn and soybeans results in increased cultivation of lands for those crops. That decreases the supply of other crops, such as peas and beans (Clayton, 2008).

The reason that supplies of peas, beans and other crops decrease as a result of increased corn and soybean cultivation is because the supply of agricultural land has not increased. Instead, suburban sprawl has decreased the supply of agricultural land (Wiewel & Persky, 2002). Over the past four years, sprawl increased as a result of robust new housing starts, which in turn were a function of the real estate bubble. The Federal Reserve dramatically increased the money supply by lowering interest rates below equilibrium in the early part of the decade. This lead to a bubble in the housing market. With housing starts being a lagging indicator, the impact of this bubble has been felt most strongly in the past four years. This increase in demand for new homes led to a reduction in the supply of agricultural land, which meant that farmers were unable to cultivate new lands to keep up with increased demand from the biofuel industry.

The third main factor in the global food price spike is the increasing price of fuel (Lapidos, 2008). The causes of this are only speculative, but are believed to derive from increased demand from large developing nations such as China and India. The spike in oil prices drives food prices in many ways. Our food market is global, so food must be transported long distances to reach the markets. Additionally, the food industry relies on oil as a key input in production, packaging and processing. For example, plastics are used extensively in food packaging in developed markets. Fuel prices spiked in 2008, bringing about dramatic increases to food prices that brought this crisis to a head. Compounding the issue, increased demand for fuel leads to an increased demand for biofuels. Higher oil prices reduce demand for oil in the developed world. This does not affect the price of oil, because developing markets absorb that demand. But decreased oil demand in developed markets means increased demand for alternative energy sources, of which biofuels are among the most economically viable. The result is that biofuel demand increases.

We have seen some easing of these supply and demand pressures as fuel prices have dropped dramatically. Yet, the high volatility of fuel prices indicates a low supply. Many observers believe we have hit peak oil already. Therefore, food prices will continue to be volatile. In order to protect against such food price shocks in future, we must consider the interconnectedness of energy policy and food policy. The past four years has shown as that the supply-demand functions of many sectors of our economy are interrelated. As the world's population continues to increase, demand for food will continue to grow, as will demand for oil. Based on the relationship patterns of the past four years, it seems evident that global food prices will continue to escalate until the supply and demand drivers of food production are decoupled from those relating to our energy needs.

2) One of the major food inputs in North America is corn. Corn is used extensively as an ingredient, and is a major feed crop. Over the past few years, corn has been subject to "unprecedented demand conditions" (Hoffman, et al., 2007). Feed crops such as corn have traditionally been subject to two main demand drivers - domestic feed use and export feed use. To this, a third driver has been added in recent years, that being demand for corn for the production of ethanol. The use of ethanol has been promoted widely as an alternative to expensive, polluting fossil fuels. As the price of oil has increased over the past four years, demand for alternative energy sources such as biofuels has also increased. Demand for corn as a biofuel is expected to exceed demand for exports in the near future (Ibid.).

In the past four years, corn prices have increased steadily, from under $2 per bushel in 2005 to $3.40 per bushel in 2007 (Leibtag, 2008). Futures prices recorded at the Chicago Board of Trade indicate continued increases expected in the market well into 2009 (CBOT, 2008).

By the end of the 2006/07 crop year, 19% of the corn crop went to biofuel production, a 30% increase over the previous year (Ibid.). This increase in demand for corn in biofuel is believed to be a major contributor to the increase in corn prices. However, corn price increases flow through to food price increases inefficiently, and it is felt that the net impact of the recent corn price increases on food production has been less than 1%.

Another component of corn demand is the export sector. Demand for U.S. corn exports has been decreasing. For example, the projection for 2008/09 is down 50 million bushels (Hilker, 2008). This demand is affected by substitutes. Coarse grain production in other parts of the world has increased, which has suppressed international demand for U.S. corn. A contributing factor is the high price of corn. Many countries that import U.S. corn do not have strong demand from the ethanol sector. Therefore, they are willing to substitute other grains if the price of corn is too high. However, lower export demand is offset by increased ethanol demand.

The largest market for U.S. corn production is the domestic feed market. The high cost of corn has also resulted in some substitution in that market. The percentage of corn in feed has decreased slightly as the percentage of other coarse grain has increased. Additionally, high feed prices threaten to reduce the number of grain-consuming animal units (Hoffman et al., 2008). While this market has been slower to react to market shifts than the other key markets, it is the largest market so its impacts are still felt.

On the supply side, total corn production in the U.S. is relatively flat. Projections for the 2008 season show a decline in production of 13 million bushels nationwide, attributable mainly to lower yields (Hilker, 2008). The higher corn prices have spurred an increase in acreage, however. It appears, though, that increases in acreage have not met increases in demand.

As corn prices have increased, demand from the two traditional markets has decreased in response. However, despite new acreage, supply increases have been unable to keep up with the rising demand from the ethanol sector. Ethanol demand has tripled in the past six years and is expected to continue its rapid growth. In export markets, substitutes are emerging to suppress demand for corn, but in the domestic feed market this process is happening more slowly. Therefore, total demand for corn continues to increase. Supplies have increased slightly in response, but these increases have not matched demand increases from the ethanol industry, which continue to be the main driver of corn prices in the U.S.

3) Rising food prices have many impacts on individuals and governments. In developed countries, rising food prices primarily benefit farmers and landowners, who see increased returns of their labor and investment. Consumers, however, do not benefit. In developed countries, the primary impact is that consumers are forced to dedicate a greater portion of their income to food. Food demand in developed countries is generally price inelastic. Part of this is because increases in food commodities flow through to consumers in an inefficient manner. Raw food inputs are only a small component of the cost of highly-processed food. So for example the overall food cost increases will be less than 10% of the increases to the cost of corn. Most of the cost increases are absorbed by animal farmers and food manufacturers, not the consumers (Leibtag, 2008).

This distributes the burden of the cost increases in the developed world. It also means that food cost increases are relatively minor in the developed world. In these regions, the relative wealth of the populace means that food demand is price inelastic. Eating habits will not change as a result of these incremental increases in food prices. Consumers will shift their spending habits to account for the increase percentage of their income that they must… [END OF PREVIEW]

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Food Prices.  (2008, December 5).  Retrieved May 25, 2019, from https://www.essaytown.com/subjects/paper/food-prices-past-few-years/3012

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