Global Food Crisis - Assignment Example

Answer 1: Considering the explanation that global food crisis is pushed by shortages of wheat due to some cyclical factors such as random adverse weather conditions that have reduced harvests in key producing countries. Figure 1: Demand-Supply curve for Wheat These factors have put left side pressure on the supply curve (SS) of the wheat which results in shift of supply curve of wheat to the upper left side (SS’). This changes the equilibrium position (E) that exists in the wheat market to a new position (E’). Simultaneously, this changes the equilibrium price (P) and equilibrium quantity (Q) positions to P’ and Q’. Eventually, this food crisis results in higher prices of wheat in the market. Figure 2: Demand-Supply curve for Rice As wheat and rice are close substitutes, when the price of wheat goes up consumers start preferring rice over wheat. This creates huge demand for rice and puts right side pressure on demand curve of the rice (DD), which results in upper right side shift of the demand curve (DD’), which eventually again results in higher prices of rice. Answer 2: Figure 3: Year wise consumption of rice in world (Univ.), 2006) (Rice consumption, 2002) The rice consumption in the world is has been growing at almost 1% annually since 1998-99. In the initial years (1998-99, 1999-00) the production of world rice was more than its consumption. However since the beginning of 21st century the demand of rice has outpaced its production and stocks of rice are coming down to unprecedented levels. This significant increase in the rice consumption is led mainly by the consumption in Asian countries. However, in recent years the demand for rice in Asian countries has grown at lesser pace. The main reason of this consumption pattern is growth in per capita income has shifted the demand from rice to other non-vegetarian foods such as meat. However, the majority of the populations in these countries are still living below poverty line and there is huge amount of unmet demand which can drive the consumption of rice at new levels. Answer 3: (i) If the countries move to develop higher yielding varieties of rice then this will result in higher supply of rice from all over the world. This will shift the supply curve of the rice (SS) to the lower right side in equilibrium demand-supply curve i.e. SS’, resulting in lower price of rice (P’). This would put lower pressure on foods like wheat resulting in overall price of foods coming down. Figure 4: Demand-Supply curve for Rice (ii) One of the major factors driving the current food crisis is the growing economy of developing nations such as China and India. Due to growth in GDP their per capita income has increased manifold resulting in higher consumption power. Earlier a major fraction of the demand of the world food was satisfied by these developing nations which were highly dependent on agriculture, but now the same food is turning out to be lesser to satisfy their domestic demand. At the same time, higher energy consumption in these rising economies have resulted in rising energy prices and energy intensity of the agricultural sector have increased the cost of critical inputs like fertilizer, fuel, and power. So, if there will be a slowdown in the growth of the two economies China and India then definitely this will result in lower consumption power giving ease to the demand of the food articles as well as to the above mentioned input cost and that will bring down the level of prices of food articles. Answer 4: The Consumer Price Index (CPI) measure a change over time in prices of a given basket of goods & services. These baskets of goods range from food and beverage articles to apparel, recreational and other services. The CPI represents the weighted average of the prices of these goods and services (Malik Crawford, 2009). Figure 5: CPI-U for USA (U.S. Department of Labor, 2009) Every basket of goods and services has its own weight in the CPI. For an example in United States of America the basket of Food and beverage has weight of 15.75% (United States Department of Labor) in calculation Consumer Price Index for all urban population (CPI-U). The above figure shows how CPI-U for USA has changed over the period. As the prices of foods articles increases the weighted value of foods article also increases in the calculation of CPI-U which directly results in higher value of CPI. However the standalone value of CPI doesn’t have much significance as it need to be compared to some base value to analyze the percentage change in the CPI which in turn shows the inflation level in the country. Answer 5: Introduction: Over the past few months the debate over the impact of increased demand for bio-fuels, especially from rich countries, on the global food prices has reached unique levels. Global real food prices were already at a decade-high by the end of 2007 and several more increases have been observed in 2008 (Nicolas Gerber, 2008). Riots in several developing countries have erupted as a result of high food prices. The international community also struggles to provide adequate food aid as commodity surpluses are diverted to the bio-fuel sector and commodity prices have soared, decreasing the purchasing power of fixed aid budgets. The following few paragraphs would try to figure out the truthiness about relationship between the production of bio-fuel and higher prices of food articles. Factors behind the surge in the food prices: The recent surge in the global food prices have been driven by a number of fundamental causes, some of them are cyclical and others are structural in nature. These factors have in particular severely affected the prices of two most important staple food grains. The cyclical and structural factors can impact the price by raising demand and constraining the supply. (S. Hafeez Rahman, 2008) Cyclical factors such as random adverse weather conditions are short in nature that can be controlled over the year while the structural factors such as increased input costs for the agriculture due to rising energy price, are long term phenomenon. The other most significant structural factor that has been considered to be one of the reasons of the current soaring prices of food articles is the production of bio-fuels. According to a report by UN Energy in 2007, bio-fuel production appeared to have driven up the price of maize in 2006 and 2007 (Energy, 2007). Due to limited availability of petroleum, the developed countries were searching for some other alternative and bio-fuel turned out to be the best alternative possible as this is also considered as environmentally safe. The recent surge in the price of crude oil gave more power to this belief and almost all the agricultural based country started encouraging production of corn and soybeans which can be converted into bio-fuels and sold to the industrial countries. Theory behind the relationship between rising food prices and bio-fuel production: The higher bio-fuel demand in the United States and the European Union (EU) has not only led to higher corn and soybean prices (Figure 5), it has also resulted in price increases on substitution crops and increased the cost of livestock feed by providing incentives to switch away from other crops (Valerie Mercer-Blackman, 2007). Figure 6: Demand-Supply curve for Bio-fuel crops Due to the higher price of bio-fuel crops the farmers of developing countries are more attracted towards these crops rather than the conventional crops of wheat and rice which are not providing them adequate profits. This switch in crop production has put a supply side pressure on the food articles and resulted in the skyrocketing prices (Figure 6). Figure 7: Demand-Supply curve for Food Articles Facts against theory: Supporting the above points, according to a report by Oxfam International bio-fuels have contributed up-to 30 per cent to the global rise in food prices and its increasing demand from western countries has pushed more than 30 million people into poverty (Bio-fuel responsible for rise in food prices: Study, 2008). However there are some experts who consider the bio-fuel production as an irrelevant factor in the rising food prices. It is difficult to straighten out the logics behind each opinion, yet some facts cannot be by-passed. As of 2007, the share of feedstock absorbed by the bio-fuel sector still represented the smaller part of the total demand for feedstock. Major fraction of the total demand for grains comes from fodder (36%) and food and seeds (60%), whilst at the same time meeting the increase in non-bio-fuel demand for grain and oilseeds would require increasing production by only 2% per year over the next 8 years (Marktbericht, 2008). Yet, the recent increase in demand for specific crops can be largely attributed to the bio-fuel sector. In the report of Mitchell (2008), it was mentioned that of the 55 million tons increase in US maize production between 2004 and 2007, 50 millions were absorbed by the bio-fuel sector. For the same period, the consumption of vegetable oil for biodiesel is estimated to be increased by 6.6 million tons, constituting 34% of the increase in global vegetable oil consumption. Conclusions: There are certain arguments and theories supporting the logic that bio-fuel production has created the environment for higher food prices while certain others are opposing the logic. Some facts have even shown that the recent spur in the food prices is mainly attributed to the bio-fuel production. However this turned to be a short term phenomenon as the oil price in international market came down the feasibility of producing bio-fuel crop also came down. However the problem may arise again because the world doesn’t have any alternate to the current energy resources except the bio-fuel option. References: Bio-fuel responsible for rise in food prices: Study. (2008, June 25). Retrieved April 20, 2009, from The Financial Express: http://www.financialexpress.com/news/biofuel-responsible-for-rise-in-food-prices-study/327369/ Energy, U. (2007). Sustainable Energy: A Framework for Decision Makers. Malik Crawford, S. K. (2009). CPI Detailed Report. Marktbericht. (2008). Toepfer International. Nicolas Gerber, M. v. (2008). The Impacts of Biofuel Production on Food Prices: a review. Rice consumption. (2002). Retrieved April 20, 2009, from Food Market Exchange: http://www.foodmarketexchange.com/datacenter/product/grain/rice/detail/dc_pi_gr_rice0802_01.htm S. Hafeez Rahman, A. D. (2008). Soaring Food Prices: Response to the crisis. Philippines. U.S. Department of Labor. (2009, 4 15). Retrieved April 20, 2009, from ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt United States Department of Labor. (n.d.). Retrieved April 20, 2009, from http://stats.bls.gov/news.release/cpi.t01.htm Univ.), A. A. (2006). Proceedings for Workshop and Conference on Rice in the World at Stake, 2. School Lunch Programs and Rice Consumption Behaviors: International Comparison. ISSN , 28. Valerie Mercer-Blackman, H. S. (2007). Biofuel Demand Pushes Up Food Prices. Newyork: IMF: Survey Magazine: IMF Research. Read More