Advancing a Free Society

Public Policies and Rising World Food Prices Once Again

Monday, November 22, 2010

From 2002 to 2008 the prices of many foods, including corn, wheat, and rice, increased by a lot. For example, The World Bank’s index of food prices increased by over 100% from 2002-2008. Grains and other food prices fell rather sharply during the financial crisis, along with the fall in oil prices and those of other commodities. But food prices are rising once again. The UN’s Food and Agriculture Organization indicated that its food index rose in October to levels last seen during the peak in 2008.

Food prices are marching up again mainly because the world economy is recovering from the crisis. Fast growing economies like China are increasing their demand for wheat, meats (animals use lots of grain as animal feed) and other foods that were formerly out of reach of the typical family in these economies. Reactions to the food price increases include Russia’s and Ukraine’s banning of wheat and some other grain exports “temporarily”, and China’s threat this past week to impose price controls on various foods, such as ginger and garlic, that are important in the Chinese diet, and have been rising rapidly in price.

A little basic economics is useful in evaluating these and other proposals. The world price of grains essentially equates the world supply and demand for grains. An increase in world demand for cereals and other foods- perhaps because of economic development in poorer nations that raises the average family’s demand for wheat, corn, and meat- would increase both the prices of grains and the quantities produced and consumed. An increase in world supply-due perhaps to good weather in grain growing regions, or to greater agricultural efficiency, such as through the development of genetically modified foods- would also increase world consumption of grains, but supply increases would lower world grain prices.

Continue reading Gary Becker at the Becker-Posner Blog

(photo credit: Red Cross)