Food Price Crisis 101

Causes and Solutions to the Crisis

Food prices and political instability are rising sharply in a world agricultural system that is in transition and under pressure from changing diets, market turmoil, and rising energy costs. Food prices have risen 83 percent worldwide since 2005 and some staples such as rice and wheat have risen 141 percent and 130 percent respectively in the last year alone. In an increasingly resource-constrained world, there is little margin for error. Even in the months prior to the current crisis, over 830 million people worldwide went to bed each night malnourished and hungry.

Confronting the current crisis and achieving lasting global food security will require immediate attention and long-term investment. The United States and the international community must construct a proactive response that will invest appropriately in farmers at home and agricultural development in the developing world. Opening world markets, with appropriate safeguards, will be a key component of our strategy. Together, these actions will help deliver a stable and affordable food supply and farm income for millions.

The timing could not be worse for many of the world’s hot spots and the United States’ long-term national security. Rising prices and low stockpiles have fueled civil strife and political instability in urban areas of vitally strategic countries such as Egypt, Indonesia, Afghanistan, Somalia, Haiti, Pakistan, and India. At the precise moment when the United States has a narrow window of opportunity to contribute toward progress on the security, political, and economic fronts in key countries such as Pakistan and Afghanistan, the streets have erupted in food riots.

Dramatic increases in food prices disproportionately affect the poor both in the United States and abroad. The purchasing power of families, food banks, and aid agencies erodes as prices rise, and they cannot keep pace with rising costs. Food banks and soup kitchens in the United States are reporting dwindling stocks and a 20 percent increase in visitors since April of last year. And in developing countries, where 60 to 80 percent of a family’s income is spent on food, every 20 percent increase in food prices will push 100 million more people into the ranks of the poorest of the poor living on less than one dollar a day.

Food inflation in the United States is at its highest levels in 17 years. Enrollment in the nation’s food stamp and nutrition programs has grown by 1.3 million to its highest levels ever. The U.S. Department of Agriculture estimates that the price of household food purchases will rise by 4 to 5 percent this year. Poor Americans spent almost 6 percent more of their income on food in 2006 than households with incomes above $70,000. Congress must use the Farm Bill and other legislation to provide additional funding to increase the budgets of the food stamp and nutrition programs so that they can serve more Americans in need.

Causes of the Crisis

The current situation cannot be blamed exclusively on a single cause, such as biofuels, without taking into account the multiple external forces exerting pressure on a global agricultural system under strain and in transition.

Changing Diets: Demand is surging in the developing world as a result of income growth, changing diets that include more meat, and increased urbanization. Raising beef for human consumption requires vast quantities of grain. It takes 8.3 grams of corn feed to produce 1 gram of beef.

Global Warming and Drought: Drought and volatile weather in key grain producing countries such as Australia and the Ukraine have limited supply. As Australia enters its 10th year of drought, many analysts predict that climate change will exacerbate competition for natural resources and reduce crop yields in sub-Saharan Africa by 20 percent in some scenarios. Climate change-induced famine may also displace more than 250 million people worldwide by 2050, further exacerbating the challenges to national security.

High Energy Costs and Market Turbulence: High oil prices and energy costs fueled by global demand, a low U.S. dollar, and tight supply have increased costs at every stage of agricultural production and transportation. High gas and energy prices have also driven many consumers into debt, further straining individuals’ finances worldwide. Financial turmoil in other sectors has sent speculators and investors chasing high prices in grain commodity markets.

First Generation Biofuels: The tremendous recent growth in first generation biofuels, such as corn-based ethanol, pushed forward by government mandates and subsidies in the United States and the European Union, are playing a role in planting decisions and global grain prices. At the same time, the contribution of biofuels to a rise in world food prices must be kept in perspective. At present, feedstock demand for biofuels affects prices and indirectly affects land use, but it is also worth noting that only 4 percent of world grain is being used in biofuel production.

Solutions to the Crisis

So how can the United States and other countries reverse escalating prices? In the short term, Congress must replenish the $200 million in wheat stocks it recently released for a special emergency fund and approve $550 million in emergency food aid as part of a supplemental budget request.

In the Farm Bill, Congress should support, at minimum, a $25 million pilot program to encourage purchasing food from local producers. The middlemen must not prosper in times of crisis. When only four companies and their subsidiaries sell more than half of the $700 million in food commodities supplied through the U.S. Agency for International Development’s food aid program, there is need for change. Shipping regulations must be reformed so that over half of the $300 million-plus spent on food aid shipments is spent more economically and distributed to more than just five shipping companies.

The United States must also contribute more to the United Nations World Food Program. We must insist on accountability and a role for experienced, on-the-ground nongovernmental organizations in the distribution of $2 billion in annual U.S. food aid.

The U.S. Department of Agriculture estimates that American families in the bottom quartile are spending 32 cents of every dollar on food. It is critically important to increase participation through more outreach and for Congress to pass the Food Stamp Program improvements in the Farm Bill that index the standard deduction to inflation, raise the minimum benefit, and exclude college savings and retirement accounts from counting against applicants. In the short-term, a temporary increase in food stamp benefits would provide immediate help to millions of families.

But much more needs to be done. In many developing countries, agriculture employs over half the labor force and agriculture productivity is a fundamental building block of economic development and poverty reduction. The United States and developed countries have neglected investment in agricultural development and small farmers in developing countries for far too long, and they must regain a central role in the development agenda.

The current food price crisis must also be a top priority at the G8 summit in July. Any "New Deal" on agriculture, such as the World Bank has proposed, is welcome, but it must prioritize food production that preserves the soil and water supply, encourage using locally available resources and traditional seeds, and depend less on fossil fuels. It will be vital to fund scientific research to increase food production yields in a safe and transparent manner. Adapting to climate change will require increased funding and local strategies driven by local needs.

The International Monetary Fund can play a constructive role by making rapid financial assistance and risk insurance available for countries hit hard by food price-related shocks. In so doing, the IMF may also be investing in its own institutional future.

Global warming’s effect on agriculture and development in developing countries is projected to be particularly acute. Over 1 billion of the world’s poor depend on agriculture for their livelihood, and it is predicted that severe crop losses leading to food shortages in Africa and South Asia will happen in a much shorter timeframe than previously anticipated.

The United Nations Development Program recently released an analysis indicating that by 2015, $86 billion of additional assistance will be required annually for developing countries to address adaptation assistance needs associated with climate change. Given the magnitude of the coming crisis, it is in the United States’ national security interest to provide financing to allow the most vulnerable developing countries to prepare for and adapt to the effects of climate change in agriculture and development. Open and transparent adaptation programs that meet the goals and needs established by local communities must become an international priority.

The G8 must also work with developing countries to bring the World Trade Organization’s Doha Development Round of negotiations to a successful close. The developed world—particularly the United States, the European Union, and Japan—must reduce their indefensible subsidies and tariffs on agricultural products. Barriers to trade between developing countries must also be reduced. Liberalizing trade in agriculture and a completed Doha round will bring modest immediate economic gains to several, but not all, developing countries. Open markets must also be accompanied by investment in infrastructure and agricultural productivity to ensure a virtuous circle of economic growth and progress in global living standards.

Finally, the next generation of biofuels does have a role to play in diversifying our energy needs. But we must move forward on biofuels smarter and better. We must transition beyond corn as a feedstock and strive to produce only advanced biofuels that deliver measurable life cycle greenhouse gas reductions, utilize non-food based feedstocks, adhere to certifiable environmental safeguards, and grow on semi-arable land that does not compete with food or feed. Congress should begin to phase down ethanol subsidies and reduce tariffs on biofuels produced overseas in a sustainable manner.

Conclusion

Food prices will remain high in the medium term due to income growth and new diets in poorer countries, the effects of global warming and adaptation, high oil prices, and alternative markets. And the resulting political instability will continue to threaten national security.

The world food system must transform to meet these challenges. Affordable food and improved incomes for small farmers worldwide are achievable. The United States and other developed countries can and should act now to meet the urgent needs of the hungry and invest in agricultural development at home and abroad.

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