Potential Growth of Food Crisis - Essay Example

?Question The price of the agricultural goods tends to rise at an inflated rate than the other goods such as manufacturing due to inelastic nature of its supply. This inelastic nature is due to production process of agricultural goods that require certain conditions as well as time period to produce. Supply refers to the quantity of goods producers are willing to supply at a given price in given time period (Abel and Bernanke, 2005). Whereas demand refers to quantity of goods customers are willing to buy at a given price at certain point in time (Arnold, 2008). Point where this demand and supply meets determines the equilibrium price level at given point in time (Leamer, 2009). (Arnold, 2008) Agricultural goods demand and supply and its respective equilibrium price are largely intervened by government due to many factors such as maintaining farmers’ income stream etc. It is done by restricting supply by restricting the overall production per acreage, restricting export to certain countries, increasing tariffs, restricting price over and above equilibrium( floor price) etc. Figure below explains demand supply scenario that increases price due to supplier responding to international demand. Initially with given demand D and supply S in a country, the price is determined at equilibrium P. In case of issues in other countries such as drought etc and the country in discussion starts exporting agricultural goods to them, the supply curve shifts in the local market from S to S’. At the current point where local demand in the country is D and the supply squeezes from S to S’, the price in the local market increases from P to P1. Demand from other countries increases and the curve shifts from D to D’ towards right. The supply curve also sifting from S to S’ with supply distributed between local and international market, the new price determined will be P2. This new price is high above then price determined based on local market demand. The supplier to get benefit of this increased demand responds to the international demand, hence neglecting local demand (Mankiw, 2009). To mention as evident from the above figure, it is visible that demand curve had a greater shift towards right as it is incorporating the increased demand from the other countries in trouble, hence causing greater shift in price. The supply curve on the other hand had smaller shift due to inelastic in nature causing comparatively less shift in price (O'Sullivan and Sheffrin, 2003). The scenario can also be reverse as in case the surplus supplies overall worlds is enough to meet the demand. These cause huge variations in the income of farmers, increased supplies causes decline in prices that negatively affects farmers’ situation whereas shortage cause inflated prices and disadvantage to buyer. To control this variation in pricing, government of different countries intervenes in the market and control the supply with restrictions exports and increased tariffs on exports or even bans that maintain the price level in local market (Brickley and Zimmerman, 2009). Whereas to control the declining prices of the agricultural products government fixes floor prices (that is over and above equilibrium prices) and buys from farmer surplus products (Wessels, 2000). When excess is bought by government the level of supply available for customer is less and hence the floor price is adjusted as equilibrium price. (Rittenberg and Tregarthen) The surplus bought from farmer is then used for other purposes. For instance, US government uses this surplus for sending in aid programs. Also to maintain this excess supply, government pays farmer certain amount to reduce the per acreage production. These measures to maintain price from access price are however, harmful as they appear not aimed to maintain the income level of farmer but to maintain the international price level. As evident from the history, the supply has never in excess as compare to increase in demand of entire world keeping in consideration the factor of rising population level around the world. Hence, maintaining the demand and supply level that determines required price has more international benefits which are regarded as bad polices as mentioned in case. Question # 2 The Global food crisis has been a serious issue since the last decade. The world is facing hike in food prices due to many reasons. One of the reasons is the surge in oil prices which leads to increase in transportation cost and thus food prices. Bad weather condition is also the major problem as farmers are unable to grow food grains abundantly in order to control scarcity of food. In addition to that, restrictions on export by the countries which produce major crops and natural oil are also one of the major reasons of hike in food prices. The world’s population is increasing drastically and the rising gap between demand and supply of food could increase the food prices badly. Moreover, this time the situation can be worse than the food crises in 2008. The above issues are not only the reasons of rising food prices; speculation in commodities trading markets is also playing its part. The speculation in commodities markets such as Chicago, New York, London and other European markets is causing hike in food prices. Therefore, the first thing that the world needs to do is to restrict the commodities trading or to device major techniques which discourage the speculation on commodities. These steps would definitely help in stabilizing food prices. The increasing food prices are the major concern especially for the poorest countries. Those poorest countries which do not produce enough food domestically have to import major grains to fulfill their needs. The increasing food prices would increase their import bills and they would become more inferior. The major food importers such as Egypt, Pakistan, Sudan and Bangladesh are already short of food due to the bad weather condition, and improper infrastructure and political conditions (Daily Times, 2012). The shortage of food from these countries has also increased the gap between demand and supply and thus food prices have started to rise. According to the UN report, Russia, the fourth largest wheat exporter of the world, will face 20 percent reduction in its wheat export while the output in Australia will decline by 19 percent in 2012 (Gulf news, 2012). It has been observed that the world did not learn from its past mistakes and every time it faces the severe food crises. Every year weather, commodities speculation, and restriction on food exports greatly affect commodity markets. This is the third time that the world is facing food crises in the last six years. Internationally, the rice prices have increased by 102 percent, wheat prices have increased by 115 percent and maize prices have increased by 204 percent from 2005 to 2011 (Banziger, 2012). However, several countries have been taking certain steps to get rid of this problem. Russia has not ban grain exports this year which is a great step as it is the largest exporters of various grains (Gulf news, 2012). Africa has started investing to enhance the productivity of maize-legume cropping systems. Mexico has developed programs to increase maize and wheat yields through modernizing farming techniques, and India has launched International Agricultural Research Institution to work on food crisis (Banziger, 2012). United States is also facing the severe drought in the country and almost half of the US has been declared as disaster areas (Fan, 2012). US export more than half of the world’s maize. However, the increasing demand of maize for livestock feed and bio fuel coupled with lower maize production have become the major reason for the increasing maize prices. Therefore, many importers of maize such as African countries have started harvesting maize by themselves. These actions have been taken to control the maize prices and shortage of maize from the world (Banziger, 2012). Various food agencies such as UN food agencies are also taking actions to increase the agricultural productivity of developing countries. These actions are also necessary so that these countries are able to reduce overreliance on imports. UN food agencies, in collaboration with the government of various developing countries have also launched several programs to teach farmers about the farming techniques in order to increase the productivity of the country. Moreover, major international collaborations have also been taken place to research and control the food crisis. The CGIAR maize and wheat research programs and the wheat yield consortium are some of the examples. But these research programs do not seem so effective to help in food crises and have also failed in 2010-2011 food crises. Another major reason of increasing food prices is the use of grains to produce bio fuels. Crops such as Maize and Soybeans are greatly used by various countries such as China and Brazil to produce bio fuels. The United Nation’s food agency has now realized this problem pressurized US to alter its bio fuel policies and disallow these major food grains as a source of bio fuels (Hornby, 2012). At last, there are some suggestions through which the food prices and crises could be controlled. First, the key food agencies and institutions should pay close attention in consumption, food demand, food production, food supply, and food prices. Secondly, countries should not impose restriction policies on the exports of food grains. Thirdly, strategies should be developed to control the speculation on commodities. Fourth, use of food crops as a bio fuel must be cut substantially and finally the food agencies should boost agriculture segment of developing countries in order to produce more output. List of References Abel, A., and Bernanke, B. (2005). Macroeconomics. New Jersey: Pearson Prentice Hall Arnold, R. (2008). Economics. Mason, OH: South-Western Cengage Learning. Banziger, M. (2012). ‘Climate Conversations - How to avoid another food crisis’. Alert Net. Available from http://www.trust.org/alertnet/blogs/climate-conversations/how-to-avoid-another-food-crisis/ [Accessed 12 October 2012] Brickley, S., and Zimmerman, J. (2009). Managerial Economics and Organizational Architecture. Boston: McGraw Hill Daily Times. (2012). Potential grows for food crisis as prices surge: UN. Available from http://www.dailytimes.com.pk/default.asp?page=2012\08\10\story_10-8-2012_pg5_31 [Accessed 12 October 2012] Fan, S. (2012). ‘Effectively Responding to the Drought in the United States Can Prevent another Global Food Crisis’. IFPRI, Available from http://www.ifpri.org/pressrelease/effectively-responding-drought-united-states-can-prevent-another-global-food-crisis [Accessed 12 October 2012] Gulf news. (2012). Potential grows for food crisis as prices surge. Available from http://gulfnews.com/news/world/other-world/potential-grows-for-food-crisis-as-prices-surge-1.1060061 [Accessed 12 October 2012] Hornby, C. (2012). ‘Should change biofuel policy to avoid food crisis-UN’. Chicago Tribune, Available from http://articles.chicagotribune.com/2012-08-10/news/sns-rt-food-biofuelsfao-update-1l6e8jaa9b-20120810_1_biofuel-production-agriculture-organisation-food-price-index [Accessed 12 October 2012] Leamer, E. (2009). Macroeconomic Patterns and Stories. Heidelberg: Springer – Verlag Berlin Heidelberg. Mankiw, G. (2009). Principles of Economics. Mason, OH: South-Western Cengage Learning, 2009. O'Sullivan, A., and Sheffrin, S. (2003). Economics: Principles in action. Upper Saddle River, New Jersey: Pearson Prentice Hall. Rittenberg, L., and Tregarthen, T. Principles of Microeconomics. Available from http://catalog.flatworldknowledge.com/bookhub/reader/21?e=rittenberg-ch04_s03 [Accessed 12 October 2012] Watkins, T. (2011). A Statistical Review of Current Economic Conditions in the U.S. USA: San Jose State University, Department of Economics. Wessels, W. (2000). Economics. New York: Barron’s Educational Series. Read More