EclectEcon

Ron sent me this link from the BBC, which (amazingly) got this right. Food prices have been rising rapidly in the UK, and there are three basic reasons.

First, rising oil prices. Oil and other petroleum products are important inputs in food production. As the prices of inputs increase, the supply curve shifts to the left, driving up the equilibrium price. I'm not too sure how important the price of oil has been in causing rising prices over the past year or two, though, since they do not seem a lot higher than they were two years ago. Also, I'm not sure how much farmland would be taken out of production as a result of the rising price of oil, and in the long run, that's the only way rising oil prices could affect food prices.*

Second, rising demand for food.

A second [reason] is increasing demand for western foodstuffs from developing countries like China.... more affluent Chinese consumers eat more meat; China needs to import more cereals to feed its mushrooming population of pigs and poultry.

As people in developing countries demand more food and more food that is more easily produced in western countries, the demand curve for this food shifts to the right and forces up the equilibrium price. This effect, combined with the apparent increased food intake by people in developed countries, is probably important.

Third, the opportunity cost of selling grains for food has risen greatly because of the (misplaced?) increase in demand for grains to produce biofuels. We know that ethanol can be produced most efficiently from sugar cane, but the sugar and corn lobbies in the US and elsewhere have persuaded politicians and voters that diverting corn/maize from foodstock to the production of ethanol is somehow a good thing. As the price of corn/maize is driven up by this increased demand, less farmland is available to raise food. These higher opportunity costs have contributed greatly to the increased price of food, throughout the world.

[B]iofuels are already big business in the United States, where bioethanol is seen as a greener and more sustainable alternative to traditional petrol.

The downside is that land which until recently was growing crops for food is now growing crops for fuel.

The United Nations says a third of the total US maize crop went for ethanol last year.

The International Monetary Fund say there's no question that demand for biofuels is driving up food prices - and that it will go on doing so...

I know it is naive of me, but the strength of the US corn and sugar lobbies never ceases to amaze me.

*1b? It is likely that the recent drought in Australia has also shifted the supply curve to the left for this year.