Friday, February 18, 2011
As governments across the Arab world look for ways to calm their angry populations, one challenge in particular stands out: how to address the spiraling cost of food.
Coincidence or not, the uprisings in Tunisia and Egypt came just as world food prices hit a record high. The World Bank reported this week that the cost of food is now at "dangerous" levels.
High prices are far more burdensome for people in the developing world because they typically spend a much higher percentage of their income on food. Many also buy raw food commodities — grain rather than packaged bread, for example — and it is those commodity prices that have increased most dramatically. Wheat prices have doubled in the past six months alone.
"Many households are buying raw rice," notes Joseph Glauber, chief economist at the U.S. Department of Agriculture. "They're milling it themselves. For them, a big increase in [raw] rice prices or a big increase in wheat prices is translated into a sizable increase [in food costs]."
In an interview with member station WAMU's Diane Rehm, World Bank President Robert Zoellick described the high cost of food as an "aggravating factor" behind the unrest in the Middle East, even if it is not a primary cause.
"You had a large unemployed population and people clearly fed up with the political system," Zoellick said. "But one of the reasons I think this is an important issue today is, those countries are going through something between transitions and revolutions. That's where I'm most concerned about food now."
Many governments in the Arab world subsidize the purchase of food already, but not nearly enough to counteract higher prices. If those governments now increase those food subsidies again in response to the rising discontent, they will be hard pressed to improve delivery of other public services.
The policy challenge is complicated, but the basic economic problem is simple: The supply of food is not enough to meet the demand.
Across the world, food stocks are down in part because of unfavorable weather, ranging from drought to floods, in Russia, Pakistan, Europe, North America and Australia.
"Production of many crops was affected negatively by these unfavorable weather developments," says Abdolreza Abbassian, the chief food and grain economist for the United Nation's Food and Agriculture Organization. "This has led to tighter markets, and prices are reflecting that."
The demand for food, meanwhile, has been growing, especially in big developing countries like China.
"Sixty percent of all soybeans traded in the world go to China right now," notes the USDA's Glauber. "Forty percent of all cotton goes to China, and ... a fifth of all vegetable oil."
This imbalance between tight supplies and growing demand inevitably pushes food prices up.
But government policies also play a role. World Bank officials intend to make that point during the current meeting in Paris of finance ministers from the Group of 20 industrialized and developing countries. Among the issues to be discussed is the imposition of food export limits, another factor in rising world prices.
In the U.S., government corn policies are part of the problem. Since 2006, the U.S. Congress has used tax credits and industry mandates to divert part of the U.S. corn crop to the production of ethanol, a biofuel.
The ethanol tax credit costs U.S. taxpayers $6 billion a year. It also drives up food prices. The more ethanol is produced, the less corn is left to feed livestock or people. The key justification for the ethanol policies is to reduce dependence on imported oil, but the policies come at a cost.
"It sets up a tradeoff or conflict between the perceived national security benefits of providing a substitute for imported crude oil versus the increased food prices," says Bruce Babcock, an agricultural economist at Iowa State University. "There is no doubt at all that expansion of the ethanol industry has increased the cost of producing meat, dairy, eggs and food around the world."
The U.S. government now requires oil companies to blend ethanol into their gasoline products. It gives them a tax credit for each gallon of ethanol they produce, and it limits ethanol imports. According to Babcock's calculations, the policies together push the price of corn as much as 40 percent above what it would otherwise be.
It is one more factor contributing to the spiraling cost of food around the world and causing hardship for food consumers in the Middle East and beyond.