The increase in food prices in recent years has been dramatic. World food prices roughly doubled between 2004 and 2008, then declined sharply as a consequence of the global economic crisis and now is rising rapidly again and may soon reach or even exceed its 2008 peak.
The price of a commodity will rise if demand increases in the face of an upward-sloping supply curve (unit cost increasing with amount produced) or if, with demand unchanged, the supply curve shifts upward, or if both changes occur. (There are other conditions, such as cartelization, that can drive up prices, but I’ll ignore them.) The supply curve of food is upward sloping, and demand for food has been increasing because of increases in population and in income in poor countries (with higher incomes, people eat more and also eat more costly food, such as meat as compared to bread or potatoes), and also because of demand for biofuels, such as ethanol, that often are manufactured from crops. The increase in demand moves output out along the supply curve, increasing cost and therefore price. In addition, the supply curve itself has been moving upward because of the increased price of oil (a major input into fertilizer and into the operation of farm machinery and transportation of agricultural output to processing plants and markets) and the output-restricting measures taken by Russia and China recently, discussed by Becker.
The increased food prices are calamitous for very poor countries, and for poor people in other countries (in the absence of subsidy, such as the U.S. food-stamp program), but the world as a whole can take them in stride because they are self-correcting. High prices reduce demand and thus move output down the supply curve, resulting in a new, lower-price equilibrium.
High food prices might even be considered a good thing from the standpoint of overall global economic efficiency. Farmers are a small minority in wealthy countries such as the United States and France, but the small size of the agricultural sector actually augments its political power, because a compact interest group can enrich its members by obtaining protective legislation that raises the costs of the rest of the population by only a small fraction. The result is widespread restrictions on food imports that reduce agricultural output in countries that produce agricultural products for export. A notable restriction is the U.S. tariff on ethanol produced by Brazil, which manufactures ethanol from waste agricultural byproducts, such as cornstalks, rather than, as the U.S. does, from a valuable crop—corn.
The “green revolution” greatly expanded agricultural production and caused farm prices to fall. Whether there will be comparable innovations in the years ahead cannot be predicted with any confidence, but they seem unlikely to offset negative factors, which are numerous. Global warming will increase droughts and interfere with irrigation. Glaciers are melting rapidly, which causes flooding (as recently in Pakistan) but decreases the amount of water in rivers or lakes. The reason for that decrease is that while glacier evaporation increases rainfall, rainfall does not significantly increase the amount of water in rivers or lakes, which are major sources for irrigation both natural and artificial, because rain falls randomly; in contrast, normal glacier melting feeds rivers and lakes directly. There is in fact a worldwide water shortage; it can be alleviated by a variety of means, but most of them are costly, such as desalination.
World population and incomes can be expected to grow for a number of years; so, as agricultural output moves out along a rising supply curve, agricultural prices may continue to rise steeply for many years, with, eventually, calamitous consequences in poor countries. And agriculture is increasingly vulnerable to blight because there is less agricultural diversity; farmers the world over use the same (“best”) seeds for each crop, reducing genetic diversity and so increasing the vulnerability of crops to disease.
The most promising technological innovations in agriculture involve genetic modification of crop seeds. Limitations on the consumption of genetically modified crops may seem an example of legal measures intended for the protection of domestic agricultural production. Certainly that is a motive and certainly the concern that eating genetically modified crops is dangerous to one’s health is spurious. Nevertheless such crops pose potentially serious environmental dangers. They are engineered to be like weeds—hardier than natural vegetation—and we all know what weeds can do to the vegetation they come into contact with. Genetically modified crops thus may destroy large areas of natural vegetation. Moreover, simply expanding the area of the earth’s surface that is under cultivation is likely to cause deforestation, which is environmentally harmful. Moreover, as less fertile or accessible land is brought under cultivation, the marginal cost of food production rises.
The combination of rising population and incomes, stimulating demand, and increased costs of agricultural supply, spells continued steep increases in food prices. (Some of the costs are external, however, and hence do not directly affect food prices.) The tendency may be reinforced by the kind of inefficient responses to high food prices that we are witnessing in Russia and China. At some point increases in food prices may induce reform measures that would moderate the increase, such as elimination of tariff barriers. And even before that, rising food prices may induce private adjustments, such as lower birthrates and less meat consumption, that reduce the demand for and the cost of food, and hence food prices.
Of course the future is uncertain, and food prices famously volatile. Nevertheless the probability of continued increases in food prices cannot be reckoned slight.