What’s fueling the food crisis?
Why is food so expensive right now? Ask 10 experts and you might get 10 different answers. Bad weather, export restrictions, hoarding and speculation are all popular explanations for the continuing rise in the cost of basic food staples. But it is hard to argue that the price of fuel, in particular oil, is not playing a significant role.
The graph above makes a pretty convincing case for the relationship between food and fuel prices, with the painful peaks in food and oil prices coinciding in the summer of 2008 and recent surges occurring almost uniformly for food and fuel.
What explains this uncanny correlation? The obvious answer is that it takes fuel to make food. In particular, producing the nitrogen-based fertilizers that are essential in pushing up crop yields takes large amounts of energy, and thus fuel. Transporting food, whether by land, sea or air, also requires fuel, as do a number of other farm inputs, from pesticides to tractors.
There is also controversy over the role of biofuels in rising food prices. When conventional fuel becomes more expensive, it is more economically appealing to find other fuel sources such as biofuels made from maize and sugar. This may cause farmers to divert land away from food crops to plant lucrative biofuel crops. In the US and the EU, government mandates requiring a certain level of biofuel production can divert land even when fuel prices are low.
Over the long term, the loss of arable land for food production could be a major contributor to rising prices, with a July 2008 World Bank report concluding that when trying to explain the 2008 food crisis, “the most important factor was the large increase in biofuels production in the US and the EU.” Several prominent figures have recently joined the chorus of those blaming biofuels for the current price increases, including Princeton professor Tim Searchinger and Bill Clinton. The biofuel lobby has aggressively denied these allegations.
Whether or not biofuels are part of the problem, it seems that food will not start getting cheaper until oil prices — which are being driven higher by jitters over Libya — fall again. In the meantime, investing in sustainable, locally appropriate agriculture in developing countries can ensure that the world’s poorest — many of whom live in food-importing countries — are at least partially insulated from these dangerous price swings.
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March 16, 2011 at 1:41 am
The graph shows a simple correlation, not a causation. It’s hard to see how higher food prices could lead to higher oil prices, but it’s certainly possible that some other factor (or group of factors) cause both.
It’s also possible that the causal chain from fuel to food prices doesn’t go through nitrogen-based fertilizer or transportation costs but through something else. What about supply-side shocks like the drought in China and the floods in Pakistan, or demand-side shocks like high population growth and speculation?
The relationship between food and fuel is probably much more complex than just fertilizer, transportation, and bio-fuels… the fertilizer story is especially dubious. One would expect a time lag between fuel prices and food prices if fertilizer were a big factor, but the two are pretty much neck-and-neck, and in several places a change in the food index even pre-dates the corresponding change in the price of a barrel of Brent.
March 16, 2011 at 10:28 am
Thanks for the comments, Jacob.
It’s certainly difficult to demonstrate causation, and some prominent agricultural economists, including UC Berkeley’s Brian Wright, think that the links between oil and food are overdone (and that the role of biofuels is underplayed). However, many experts are confident in the link, since fuel prices also typically drive supply side price rises in most other consumer goods.
The factors you mention are undoubtedly also important contributors to high food prices, but would not explain the correlation between food and fuel, especially in 2007/8, when some of these were not present.
Your point about fertilizers is well taken, and it is worth saying that there is no convincing scientific proof (although much anecdotal evidence) that fertilizer prices are rising across the board. However, its important to note that prices can rise in anticipation of rises in the cost of fertilizer and other inputs if people are predicting these increases and driving up demand; that is often one of the stated effects of speculation.
March 16, 2011 at 11:52 am
I can see how speculation would make the time lag small or practically nonexistent, but how could it explain those instances where food prices lead fuel by a month or more? Maybe some of the instances I’m looking at are spurious..?
That said, the correlation is pretty tight, and I’ve never heard of the fertilizer explanation before… very interesting.
March 16, 2011 at 11:52 am
A helpful discussion. It’s frightening to think about the impact that a 25% increase in food prices has on families who were already spending about three-quarters of their resources on food.
March 22, 2011 at 10:59 am
omg wow