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3Qs: The human costs of high food prices

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A new study by the World Bank found that food prices have increased 30 percent over the last year, driving some 44 million people into extreme poverty since June. Grigorios Livanis, assistant professor of international business and strategy at Northeastern University, assesses the problem.

Why are food prices increasing?

I believe the majority of the food price increases can be explained by market fundamentals (e.g., supply and demand factors) and agricultural policies in the U.S.

The growing use of corn in the production of ethanol increases the demand for and thus the cost of corn. Increased corn prices influence the cost of livestock because corn is central to the production of meat and poultry.

In addition to the rising cost of corn, the price of all inputs used in the production of food are about 17 percent higher in 2010 than in 2007. A major component of this increase is higher fuel prices.

The increased costs of corn and fuel combined with population growth, higher income per capita around the globe, and strong demand for food products — especially for meat products in emerging economies — help to explain the rise in food prices.

Some experts say that rampant price speculation on food by Wall Street investment bankers has led to the dramatic increase in prices for wheat, corn and sugar in countries such as Egypt, Morocco and Pakistan. What role has U.S. policy played in the crisis?

While commodities speculation may affect price volatility in the short run, I think that there are “fundamental” or “agricultural policy” reasons for the increased prices, such as the emergence of ethanol. For instance, studies found that 30 percent of the rising food prices in 2007 were due to increased demand for biofuel, while about 67 percent could be attributed to a rising standard of living around the world.

In contrast to the U.S. situation, producers in developing and emerging countries did not seize the opportunity from the increased food prices to raise production. This was attributed mainly to weak institutions and available technology, limited access to affordable inputs, such as fuel and fertilizer, and trade barriers, such as tariff reductions.

Why haven’t U.S. consumers been significantly affected?

Given the affluence of the U.S. consumer, the share of total expenditures on food is relatively small, less than 10 percent. As a result, U.S. consumers are less dramatically affected by large price swings, whereas countries like Egypt, Morocco, and Pakistan have been more dramatically affected because food represents a larger share of their budget. However, economic recessions, especially in conjunction with rising food prices, may change how food is consumed. In developed countries, people will tend to eat more meals at home and less at restaurants. In developing countries recessions might lead to decreased food consumption. If we are looking for a tangible impact of rising food prices on U.S. consumers, a recent report predicts that grocery costs could rise by more than 4 percent in 2011.