Thursday, February 17, 2011

Five reasons why food prices are going up

Food prices have again reached and even surpassed the record highs of 2008. Wheat is leading the way as the price for that commodity has doubled in the span of a year. There are several factors that are driving the prices up. NPR's Money Matters blogger Jacob Goldstein asked Abdolreza Abbassian of the UN's Food and Agriculture Organization just what those factors are.

Abbassian attributed the price rise to several factors — some familiar to me (and probably to you), some less familiar.

1. The rise of biofuels, like ethanol made from corn. This market, driven largely by government subsidies, has created demand that is what economists call "price inelastic" — demand stays strong even as prices rise.

2. More demand from the developing world, particularly for meat. Livestock eat grain, so increasing demand for meat means increasing demand for grain. This source of demand has also been price inelastic, Abbassian said.

3. Disappearing stockpiles.

Because of WTO rules, the U.S. and Europe have been moving away from subsidies that led to vast reserves of wheat and corn.

Subsidies still exist in the U.S. and Europe, but they've taken a different form. Governments used to buy and stockpile surplus food from farmers. Now it's more common for governments to give farmers subsidy payments without actually buying any of the food they produce, Abbassian told me.

4. Speculation

The volatility created by declining stocks is in turn compounded by speculation — traders betting on the rise or fall of prices.

Abbassian argued that bringing more transparency to commodities futures markets might mitigate this issue.

"If we know who is buying it and what are they buying it for, that may get those who are just there to gamble to be more cautious about their positions," he said.

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