A lot of people are wondering what the hell is going on with food prices.

Price of rice skyrockets

Rice, dollars per ton
Source: Reuters

The price of bulk rice on global markets has tripled since the start of the year, school children in some of the world’s poorest nations are losing access to school-lunch programs, and people in places like Haiti are literally scrounging through garbage dumps in search of something to eat.

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Here in the U.S., heightened prices are putting a hard pinch on low- and middle-income families, restaurant chains are seeing their profits plunge as food costs rise and consumers seek cheaper options, and Big Box chains Costco and Sam’s are limiting customer bulk rice purchases.

Below I’ll look at some of the factors contributing to the run-up. This isn’t a comprehensive listing, just my own ongoing attempt to understand what’s going on. If I “missed a spot,” I’m sure you’ll let me know.

  1. Biofuel. Few serious people deny that U.S. and European biofuel mandates, ramped up dramatically over the past year, are contributing to the surge in food prices. The International Grain Council reports that grain (mainly corn) diverted to biofuel jumped 44 percent between 2006 and 2007. This surge in demand affects more than the price of corn. When farmers scramble to plant corn to cash in on the ethanol boom, they plant less of other stuff like soy and even wheat, putting upward pressure on their prices. Massive U.S. plantings of corn have also contributed to sharp spikes in fertilizer and GMO seed prices as well as corn-belt land rents, dramatically raising the cost of farming.

    The International Food Policy Research Institute reckons that the biofuel boom accounts for between a quarter and a third of the run-up in prices over the last three years.

  2. Drought and other weird weather, possibly related to climate change. Southern Australia, a major ag-producing region, has been been in a brutal drought for six years, which may or may not be related to climate change. Either way, the drought eviscerated Australia’s wheat crop last year, contributing to a surge in wheat prices.

    The New York Times reported recently that Australia’s drought has essentially wiped out the nation’s rice production.

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    The Deniliquin mill, the largest rice mill in the Southern Hemisphere, once processed enough grain to meet the needs of 20 million people around the world. But six long years of drought have taken a toll, reducing Australia’s rice crop by 98 percent and leading to the mothballing of the mill last December.

    Also, floods and pest outbreaks have damaged rice production in southeast Asia.

  3. The complete lack of government grain stores. Traditionally, nations kept stores of imperishable foodstuffs — in case, you know, bad weather knocks out a harvest. These could be tapped to lower prices in times of crisis and used as food aid to avert hunger scares. But according to neoliberal economic dogma, government grain stores distort markets — and so government grain stores have been phased out.

    This is true of tiny, vulnerable countries like Haiti and huge, powerful ones like the United States. Check out this USDA document [PDF] called “World Agriculture Supply and Demand Estimates,” from April 11, 2008. It gives production and consumption numbers for the last couple of years for several major crops.

    Scroll down to the chart on corn on page 12. The “ending stocks” number is essentially the store being kept by the market: production minus consumption for a given growing year. For 2005-2006, ending stocks were 1.9 billion bushels. For 2007-2008, the USDA projects ending stocks of just 1.2 billion bushels, a 36 percent drop. That’s despite a 12 percent jump in acres planted in corn.

    Now look at the line called “CCC,” a reference to the Commodity Credit Corporation, the government agency started in 1933 to “stabilize, support, and protect farm income and prices [and] maintain balanced and adequate supplies of agricultural commodities and aids in their orderly distribution.” The CCC represents our national store of corn in case of emergency, a mechanism for taking the edge off of price jumps.

    The CCC line contains big fat zeros. The survivalists, for all their insanity, have a point: Nations, including the U.S., aren’t storing food for a rainy (or drought-stricken) day.

  4. Other neoliberal policies. In the 1940s, Haiti produced 80 percent of its own food and exported coffee, sugar, meat, and chocolate. Today, it produces far less than half of its own food. Its per-capita food production [PDF] has plunged by a third since 1980. What happened? Corrupt governments, cheered on by the IMF and World Bank, ripped open agriculture markets to low-cost foreign competition and slashed agriculture spending. This led to a flood of cheap imports and a mass exodus from the land. Rather than find good jobs in cities, Haiti’s displaced farmers got a place in the “informal economy” — e.g., selling gum to other shantytown denizens.

    Now that food comes not mainly from the land but rather from the magic of the market — unmitigated by grain stores — hunger reigns when food prices jump. The market is an unsentimental food distributor. As the Wall Street Journal recently reported ($ub. req’d):

    “Haiti has enough food in the marketplace to feed its populace, but prices have increased beyond the means of many of the urban poor to pay for it,” said Michael Hess, an administrator in the U.S. Agency for International Development’s Bureau for Democracy, Conflict and Humanitarian Assistance.

    Haiti exemplifies, in an extreme way, agriculture management throughout the global south.

  5. Growing demand for meat and dairy in Asia. IFPRI numbers [PDF] show that Chinese meat consumption more than doubled between 1990 and 2005, and its milk consumption tripled. (For India, those metrics rose by a fifth.) This long-term trend exerts steady upward pressure on grain prices but likely aren’t responsible for spikes in the last couple of years.
  6. Rocketing energy prices. Sharply dearer petroleum and natural gas clearly contributes to the food-price hikes. Natural gas is the feedstock for synthetic nitrogen fertilizer — lifeblood of industrial agriculture — which has seen its use and price jump. Then there are the energy costs involved with processing and hauling food around the globe.
  7. Speculation. We know that big investment groups like hedge funds have engaged in what the Wall Street Journal has called “unprecedented levels of financial speculation in grain-futures markets.” Fleeing the real estate and derivatives markets, these funds are desperately seeking yield in an era of low interest rates.

    “When you get a huge influx of speculative money, as happened in December and January, the price inflates beyond what the fundamentals would dictate and creates a sort of balloon,” a National Association of Wheat Growers official told the Journal.

    A reading of Mike Davis’ chilling Late Victorian Holocausts, on 19th century famines in British-controlled India, shows that times of hunger and panic have long meant fat profits for grain speculators.

  8. Just-in-time inventory management at Big Box stores. To minimize costs, mega-retailers try to precisely match inventory with demand. When a surprise run happens, they can be caught short. This may have had something to do with that much-ballyhooed rice rationing at Costco and Sam’s Club.