World food prices have increased dramatically, by almost 60% on average since March last year, according to the index compiled by the UN’s Food and Agriculture Organization, and there’s no sign yet that they’re going to substantially fall back in the near future. With record prices on the Chicago Board of Trade for futures contracts on agricultural commodities, it seems very likely that high food prices are here to stay for the next few years.
Naturally, governments all over the world now feel compelled to rectify the situation and are busy enacting or preparing to enact various measures that they believe will help ease the rise of food prices. In general, however, they only succeed in making things worse.
In some places, such as Argentina, Egypt, India, Kazakhstan, or Indonesia, for example, governments have imposed new export tariffs to protect the domestic food market from rising international price pressures, thus setting the stage for endemic shortages. In other places, such as Russia or China, things have gone much further, and export tariffs have been coupled with price controls on basic foods such as bread, milk, and eggs.
The Mexican government, on the other hand, has reacted by mixing one bad idea — price controls for food — with a good idea rather a little too late: lowering import tariffs for various agricultural products. Governments in several other countries from Latin America, Africa, Asia, and Europe, including the European Union have lowered or even suspended import tariffs for various agricultural commodities coming from certain trading partners.
While this is far from the ideal of an immediate abolition of all tariffs — and it’s as distortionary as politically managed trade can be, even in time of crisis — it is certainly a small step in the right direction and might help ensure a smoother supply of food in some places.
All in all however, there seems to be little that can be done in the short term for the world’s poorest people. The hundreds of millions of people who live on the border of poverty, who spend almost all their income on food, are now faced with the threat of starvation. Already, in more than seventeen countries around the world, the hungry poor have sparked riots and civil unrest in the wake of higher food prices. The anger felt by these rough but fragile people, the fruit of desperation born out of the usual mixture of poverty and oppression that characterises the underdeveloped parts of the world, can sometimes be misguided; but in its most fundamental expression, it is just, courageous, and even commendable.
But how did this happen? With hundreds of billions of dollars spent each year on development aid and various anti-poverty programmes in the so-called third world, with an array of governmental and intergovernmental agencies designed to lift the planet’s poorest out of earthly misery, and with no notable natural disaster affecting crops and agricultural production, how can a food crisis that threatens millions with starvation have come about?
Undoubtedly, rising prices for oil and oil-derived fertilisers did have an impact on food prices, but oil prices cannot entirely account for the soaring prices observed. It is certainly true that increased demand from emerging markets, such as China and India, has also put pressure on prices. Moreover, the increased demand for meat and dairy emanating from these countries — a result of diets moving away from more traditional vegetarian foods, in favor of more western-style meals — must have triggered a process of adjustment along the capital structure that requires some time before it can supply the additional demand.
However, the pressure from both higher oil prices and higher grain consumption in emergent economies pales in comparison with the recent increase of industrial demand for grain to produce various types of bio-fuels.
Thus, almost all additional US corn production between 2004 and 2007, for instance, has been diverted to the production of ethanol, while the European ethanol production more than tripled during the same period. The increased use of grains for ethanol production has led to a fall in the supply of grains relative to overall demand during the last seven years (with the exception of 2006, which was compensated by the use of grain stocks, now at the lowest level globally in a quarter century).
This situation is not, however, a natural market phenomenon, but the direct result of various government programmes — usually in the world’s most developed economies, although developing countries are catching up — that aim to promote more environmentally-friendly energy technology or energy self-sufficiency by subsidising and mandating the diversion of a growing percentage of agricultural commodities such as corn, sugar cane or wheat, to the production of bio-ethanol and bio-diesel.
The increased production of bio-fuels in the United States, Brazil, Europe, and elsewhere is thus effectively obtained at the expense of food production — or, as it turns out, potentially at the cost of the lives of millions of the world’s poorest inhabitants who are now priced out of the market for food.
Contemplating the grotesque potential side effects of bio-ethanol subsidies in the world’s most developed economies is almost unbearable. While everyone is affected by higher food prices, for some people they mean only giving up a new pair of shoes or a night out. For others, however, the more costly food puts their very subsistence into question. No doubt, the politicians who came up with the idea of subsidising the diversion of grain to the production of bio-ethanol did not intend to starve the world’s poorest people; but the fact that the consequences were unintended does not absolve them of responsibility.
By Bogdan C. Enache for the Mises Institute.