Commodity Online
NEW DELHI: What exactly is causing the global food price inflation? Various theories have been propounded. Some say it is because people in two most populous countries are eating more food as GDP growth is rising in these countries, others blame it on speculation and others have cited global food demand.
Two recent reports have come up with a refreshingly different view point: The OECD report says that biofuel policies are responsible for increasing global food price inflation and has urged governments to reconsider biofuel support policies.
High oil prices spurring biofuels growth, a weak dollar and growing world population and rising consumption trends have combined as the driving force behind sharply higher commodity and food prices, according to an analysis by Purdue University agricultural economists and commissioned by the Farm Foundation.
In another report called "What's Driving Food Prices?," Purdue economists Phil Abbott, Chris Hurt and Wally Tyner have concluded that a complex combination of factors are fueling agricultural commodity price increases and rising food costs.
Food demand in China, India, and other emerging economies is rising as their incomes grow. However, domestic food production in most of these countries is growing in parallel. China, for example, has been a consistent and growing net exporter of cereals (including rice). The Agricultural Outlook of OECD expects China’s net cereals exports to decline only very gradually in the coming decade. For India, the picture is similar, though there was significant variability in its net trade position in the past. In short, growing food demand in the major emerging countries cannot be held responsible for the rise in world market prices for cereals, Mark Thoma, quoting OECD report in Economists View said.
The use of agricultural products, in particular maize, wheat, and vegetable oil, as feedstock for biofuel production has expanded dramatically in recent years. Between 2005 and 2007, i.e. in the period when food prices began to explode, nearly 60% of the growth in global consumption of cereals and vegetable oils was due to biofuels. Global output of cereals and vegetable oil did not decline during that period, but just grew slower than the rapid expansion of use, Mark Thoma added.
Both OECD report and Purdue University report points to two external factors creating food inflation—rising crude oil prices and transportation costs. This along with a weak dollar is responsible for the global crisis.
The OECD-FAO Agricultural Outlook expects prices on international agricultural markets will not remain at the extremely elevated level seen in the first half of 2008. However, prices are not expected to fall back to the low levels observed before the price hike either. For the 2008-17 period, average prices for major agricultural products are projected to remain some 10% to 50% higher in real terms than on average over the past ten years.
Tyner of Purdue University, an expert on energy and policy issues, said the price of oil is an important factor that has increased the demand for biofuels.
"About $3 of the corn price increase is due to the higher oil price and $1 to the ethanol subsidy," Tyner said in a media release. As long as oil prices are high and dollar is weak, nobody should expect global food inflation to fall.
