Reasons for Increase in the Prices of Food - Essay Example

From malnutrition to starvation, the increase in prices of food items has almost created a vicious circle for most of the poor nations- finding themselves struggling to meet the new challenge of high food prices.

There are many reasons for this sharp increase in the prices of food especially and a valid economic justification may not be provided to accurately outline the factors behind the increase in food prices.

Development of alternative fuel i.e. bio-diesel, low crop yields due to bad weather in major commodity-producing countries as well as the higher demand from developed as well as emerging countries, all resulted in food inflation. Besides, the recession in the US economy, one of the largest importers of commodities, is also cited as one of the major reasons behind the sharp increase in food prices as there have been substantial crises being faced by the US economy over the period of almost two years.

This paper will present a case for understanding and analyzing the factors behind the rise in food prices this year by using economic analysis.



Economics Analysis
The increase in food prices can be traced back to the last two years as FAO food Index rose by 9% in 2006 and 23% in 2007. (IFAD, 2008). This sharp increase suggests that there is a great increase in the prices of food items all over the world and many important factors are at play which are pushing the prices up. To make an economic analysis of this increase, we will outline and discuss different factors causing the prices to go up. (The World Bank, 2008)

Agriculture fuels sources
There is a general increase in the concern being shown over the impact of greenhouse gases on the environment of the world. This, coupled with depleting the oil resources of the world, has forced many developed nations to look for alternative sources of energy to fulfill the future energy needs of the planet. Bio-diesel is one such alternative that has been advocated as the potential replacement of oil as a source of energy.

However, this shift towards finding alternative sources has greatly increased the demand for food items especially rice, sugarcane, and corn –the commodities which are now heavily used in producing bio-diesel. This increase in quantity demanded rice and sugarcane especially has seen a great deal of increase due to increased demand from developed countries. (Economist, 2007). It is also important to mention that increasing subsidies on ethanol in the developed world have increased the overall demand for sugarcane because it’s now being used for producing ethanol rather than sugar. (Buntrock, 2007)

It is also important to note that due to greater demand from the developed world, developing countries, which are considered the suppliers of basic food items in the international market, started to export most of their products resulting in a strong shortage of food commodities in their own countries. This shortage of essential food commodities, in developing countries, also put strong pressure on the prices to rise upward.

Reduced Output
According to IFAD, the available stocks of cereals at the start of the year were very low. This, coupled with the reduction in the overall output level of major cereals by 6.9% in 2006, suggested a reduced supply of essential cereals in the market. (IFAD, 2008). This has been mainly attributed to the bad weather in major producing countries i.e. Brazil, Thailand, India, etc causing an acute shortage of cereals in the market, therefore, putting pressure on prices to go up drastically in a such short span of time.

Removal of Farm Subsidies
The agricultural sector, as a whole, has remained a heavily subsidized sector with substantial amounts paid by the governments in terms of agriculture subsidies in order to encourage higher production. However, the advocates of trade liberalization long advocated the removal of farm subsidies on agriculture products in most developed as well as developing countries. The gradual removal of subsidies on such commodities and linking the pricing mechanism of food items to the open market put strong pressure on the prices to go upward. (Johnson, 2007).

Increase in Income Level
There is a general increase in the income level of the masses in China, India, Brazil, etc which resulted in an overall increase in their lifestyle as well as consumption patterns. The availability of higher disposable income enabled thousands of people to afford meat and other food items which were previously considered a luxury for them. This general increase in demand from two of the most heavily populated countries in the world resulted in an abnormal increase in the prices of food times.

Thus the increase in the income level of people in emerging markets is creating a strong demand for quality food therefore because of the strong quantity demanded in the international market, prices are going up. (IMF,2008).

Conclusion
An increase in food prices is a very complex phenomenon with many correlating factors working together to produce a chain reaction resulting in high food prices. Increases in oil prices, the development of alternative energy sources as well as short supply are some of the reasons which are causing food prices to increase sharply in both developing as well as the developed world.

It is however still believed that the trends may continue to show the same results especially if the emphasis on the development of alternative fuel technologies remains the same.