Food prices rose at a 5% level in 2011. The USDA forecasts another 2.5-3.5% increase this year although many believe food inflation will be much higher. What is going on?
1) China and India have the largest and fastest growing populations creating demand for food from around the world. So one impact on prices has been rising demand from these countries, especially China.
2) The Japanese tsunami and earthquake last year drove up seafood prices by nearly 6%.
3) Vegetable prices rose 50% in the past month. Crop damage in Australia, Russia, and South America are to blame.
4) Government subsidized and mandated ethanol use has increased the demand for corn and reduced acreage dedicated to food thereby pushing food prices up. A Congressional Budget Office report concluded that the increased use of ethanol accounts for 10-15% of the increase in food prices.
5) Changes in government subsidies for crops other than corn for ethanol impact food prices.
6) Regulations restricting use of herbicides, pesticides, fertilizers, etc., while positive on some fronts, may result in poorer crop yields.
7) Increased oil prices drive up costs for transportation, fertilizer, plastic packaging and inks used to print packaging.
8) In some areas of the U.S., the government is paying farmers not to plant to save water. This reduces food supply.
9) Drier and hotter weather trends in farming areas generally reduce crop yield and drive prices higher.
10) Import tariffs and export taxes distort supply and demand, and hence food prices around the world.
See attached Forbes article for more analysis.
– Steve Odland