The spike in food prices is a global crisis, and it is destabilizing politics and economics everywhere. Food prices have doubled in the past two years, and most signs indicate they will stay high. Not surprisingly, the poor will bear the heaviest burden. Household surveys show that the poor already devote half of their spending to food. Inevitably, this percentage will rise sharply, cutting into what people have left for basic expenses like healthcare or shelter. This crisis, which caught governments by surprise, is undermining much of the progress that was made in lifting people out of poverty in the past 10 years. The World Bank estimates that high food prices will quickly pull 100 million people back below the poverty line.
The poor are not only being hurt by the food crisis more than anyone else, but they are also being blamed for it. U.S. President George W. Bush, for example, noted that when poor countries like India prosper, people there "start demanding better nutrition and better food." Therefore, he said, "demand is high, and that causes the price to go up." This view is widely shared by politicians, economists, and journalists alike. I echoed it myself in a recent column. But although the emergence of a global middle class is undoubtedly a factor in driving up food prices, it is not as important as most commentators think. We are blaming the wrong people.
That is one of the surprising conclusions of Donald Mitchell's analysis of the food crisis. Mitchell, who is the World Bank’s expert on agricultural commodities, argues that while the poor, especially in Asia, are indeed eating more meat, this increased consumption is not the cause of the spike in food prices. Take, for example, the global consumption of rice and wheat. Between 2000 and 2007, the global consumption of rice grew by 1 percent a year; consumption of wheat grew even more slowly. Meanwhile, meat consumption soared. These trends seem contradictory because when you eat chicken or steak, you are essentially consuming grains, which are the main raw material used to raise these animals for human consumption. In fact, the demand for both rice and wheat has not matched the increase in the world's population -- that is, consumers. If meat consumption in Asian countries explained today's higher grain prices, then the demand for grains should be consistently high and countries like China and India would be unlikely to have surplus grain to export. But, as Mitchell notes, the growth in demand for these grains in the past seven years was slower than the increase in demand between 1995 and 2000, when international prices were stable and Asian consumption had yet to boom. Moreover, China and India became net grain exporters in 2000, despite their growing populations and their rising meat consumption.
So what explains the fact that while meat consumption has gone up -- the indicator most commonly used to blame poor Asian countries for their responsibility for higher food prices -- the demand for grains has not kept pace? Technology, says Mitchell. Innovations in animal genetics, nutrition, and production methods have revolutionized the efficiency of the production of chicken, pork, and beef. The meat produced per unit of grain feed has increased 40 percent in East Asia since 1990, for example. So then, why are the international prices of these commodities soaring?
One indirect way in which rising consumption in poor countries is contributing to higher food prices is through increased energy consumption. The higher demand for energy in poor countries has added to the pressure that led to record prices for oil and gas. In turn, these high energy prices have pushed up food prices -- not only because they have made the transportation of agricultural products more expensive, but mostly because they boost the cost of fertilizers produced with hydrocarbons. Weather anomalies, such as the severe drought in Australia, have also contributed to higher food prices. So have speculators. In the past five years, the number of futures contracts for wheat (the commitment to buy or sell a given volume of wheat by a certain future date at a predetermined price) has quadrupled. Although a lot of idle money looking for quick returns has found its way to agricultural markets, the fact is that while speculators ride and accelerate existing market trends, they don’t create the underlying market fundamentals.
And one of the fundamental realities that financial speculators are exploiting is that the existing inventories of agricultural commodities are at record lows. In the past 25 years, most countries gradually abandoned the policy of stocking grains and other agricultural commodities. Now that commodity markets are in turmoil, most countries lack significant cushions to absorb the impact of any sudden disruption in their ability to import grains. Such disruptions can have many causes, some natural and others man-made. Climate change, for example, is already having a discernible effect on harvest cycles and crop yields. But the most important catalysts of the current food crisis are government policies -- especially in the United States -- that encourage farmers to divert their production away from crops for human consumption and toward ethanol and other biofuels. Recent studies point out that these government decisions are responsible for more than 50 percent of the recent increase in food prices and will account for more than 33 percent of food inflation in the next decade.
Of course, the explosion in food prices was an unintended consequence of policies geared to help American farmers. But it is also true that such unintended consequences could have been avoided if decisions had been based on a careful analysis of food markets rather than on the shortsighted promotion of special interests. In any case, at least we now know that the culprits of the higher food prices are not consumers in poor countries but farmers in rich ones -- and the politicians they have in their pockets.