Food Prices Boil Over

Article excerpt

PENANG, MALAYSIA -- The rising cost of wheat flour and its possible inflationary spillover to bread, noodles, cakes, biscuits and chapatti has been making hot news in Malaysia, with the government urging makers of wheat-based food products to restrain from raising their prices excessively.

It is the same bad news the world over. And wheat is only one example. The prices of many other food items are also going up.

In the world market, wheat and milk prices have risen to all-time high levels. Rice is at a 10-year record level. Corn and soybean prices are also higher than their averages a decade ago. The price of meat has shot up in many countries.

The era of cheap food seems to be over. With demand exceeding supply, there is also concern of impending shortages, as stocks in warehouses decline, and as some countries restrict the export of their food.

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In recent decades, food prices have risen and fallen. These price shifts have usually been due to output being affected by drought or crop disease, and indeed the present drought in some wheat-producing countries is one reason for the recent hike in wheat prices.

But this time there are also other more structural and long-term factors that suggest that the high levels of food prices will remain or climb further.

The first is the rising demand for many types of food in developing countries, due to population growth, rising incomes and changing tastes. China is often cited as an example of this rising demand, but there are also many countries where demand is outstripping local supply, thus increasing the pressure on world markets.

The meat-based diets that many Chinese can now afford requires far higher grain inputs than the country's traditional vegetable-based diet.

The second factor is the rising cost of inputs, especially oil that go into producing food. Oil prices above $100 have suddenly become the norm.

This hits food prices in at least two ways--by driving up the cost of inputs such as tractor fuel and fertiliser, and by increasing the cost of transporting the food across oceans.

The third factor is the boom in biofuels, which is causing land that could be growing food crops to be used for producing crops for fuel.

The increased demand for biofuels is causing basic changes to agricultural markets that may drive up the world prices of many farm products, according to a June 2007 report by the Food and Agriculture Organization (FAO) and the OECD (Organization for Economic Cooperation and Development--the an inindustrialized countries' think-tank).

Their Agricultural Outlook 2007-2016 says that temporary factors such as droughts in wheat-growing regions and low stocks largely explain the recent hikes in farm commodity prices. …