Rising Food Prices and What That Means-Becker

Malthus and the many neo-Malthusians of modern times assume that the threat from world overpopulation would show up first in rising food prices. The biologist Paul Ehrlich even predicted in 1968 in the book "The Population Bomb" that hundreds of millions persons in the world would be starving by the mid-1970's because of food shortages. Of course, that absurd forecast never materialized because during the past 40 years worldwide prices for grains and most other basic foods fell relative to non-food consumer prices. This has reversed during the past couple of years, especially in 2007, as food price inflation has greatly exceeded the price increases of other consumer prices. Are the Malthusian fears finally being realized, or is this rise in food prices due to other forces? Little evidence supports the role of population growth as an important factor behind the recent spurt in food prices since the growth in world population has slowed in each subsequent decade during the past 30 years. A more significant force behind the rise in food prices is the rapid growth in the per capita incomes of developing countries, especially China and India, which has raised world demand for proteins found in grains, dairy, and meat. Subsidies to corn and other crops to produce biofuels have also reallocated substantial acreage away from food production, and toward the production of substitutes for oil and other fossil fuels. Ethanol production will consume almost 30 percent of corn production in the United States next year, which mainly explains the rapid rise in world corn prices. In addition, droughts and animal disease in major food producers like Australia and China contributed also to recent food price increases. Many countries were panicked by the sharp rise in food prices during the past couple of years into imposing price controls on basic foods, export restrictions on food production, subsidies to food imports, and various other measures. This is reminiscent of Richard Nixon's 1973 ban on the export of soybeans from the United States because of rising soybean and other food prices. Russia, faced with parliamentary elections in December, has imposed export duties on some grains, while Putin pressured major food retailers to freeze prices on various foods until the election. The Moroccan government forced bakers there to hold the price of bread steady during the holy month of Ramadan. The European Union has suspended, unfortunately not rescinded, its rules that prevent farmers from planting cereals on a specified fraction of their land. Many other countries are also considering controls, subsidies, and regulations to prevent food prices from rising so rapidly. Most of these policies are counterproductive because they discourage rather than encourage food production. This is especially true of price controls since farmers will grow less of the foods that have artificially low price ceilings. For example, if price controls were placed on wheat, farmers will shift some land from wheat to other products whose prices are allowed to rise faster. Subsides to food production generally lead to greater supplies of food, but at the expense of distorting the allocation of resources between foods and other goods that consumers want. On the other hand, removing tariffs on food imports, removing subsidies on food exports, and easing restrictions on how farmers can allocate their land among different uses do contribute to greater efficiency in worldwide food production and consumption. Food prices declined relative to other prices during the past 40 years, and in fact for most of the 20th century, because of remarkable advances in food production technologies. These include the development of better fertilizers, new crop rotation methods, control of diseases to plants and animals, better breeding techniques, genetic modifications of crops, and other innovations. There is little reason to expect any slowdown in the rate of innovation during the next several decades, especially if governments reduce their restrictions on genetically modified crops, and if farmers are allowed to respond freely to market prices and other signals. Rapid increases in the cost of foods hurt consumers in poorer countries more than those in richer countries because households in poorer countries spend a much bigger fraction of their incomes on food. Food accounts for about 10 percent of total consumer sending in the United States and other rich countries compared to over 60 per cent in very poor countries like Afghanistan, Nigeria, and Bangladesh. This means that say a thirty percent rise in food prices over a 5 year period, with other prices and money incomes held fixed, would reduce the standard of living in rich nations only by about 3 per cent, but it would lower living standards in poor nations by 21 per cent. The nutrition of Afghanis and consumers in other poor countries who are already close to the minimal subsistence margin would be severely affected. Similarly, poorer consumers within a country spend larger fractions of their budgets on food than do rich consumers. Hence, the poor would be hurt more by rises in prices of basic foods. This is a main reason why governments are so sensitive to price increases of grains and other stables of the poor. If they forget, political leaders would be reminded of the 1977 Egyptian riots after that government raised bread prices, or the Mexican unrest at the beginning of this year when the price of the flat corn bread used to make tortilla, a staple of the diets of poorer Mexican households, rose by several hundred percent. My conclusion is that putting aside two major uncertainties, the Malthusian fears about rising food prices will not materialize. Food production will adapt to the growing demands from developing countries, and food prices in the future should continue their downward trend of the past century. One uncertainty that could upset this optimistic forecast relates to global warming, for food prices might rise steeply if global warming had sizable negative effects on the worldwide productivity of agricultural land. The second concerns biofuels, since food prices would also increase if sizable amounts of additional acreage continue to be diverted to production of ethanol and other biofuels in the attempt to cut down the use of fossil fuels.

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