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The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices PDF

254 Pages·2010·1.134 MB·English
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The Economics of Food H F F OW EEDING AND UELING THE P A F P LANET FFECTS OOD RICES P W ATRICK ESTHOFF Vice President, Publisher: Tim Moore Associate Publisher and Director of Marketing: Amy Neidlinger Executive Editor: Jim Boyd Editorial Assistants: Pamela Boland, Myesha Graham Development Editor: Russ Hall Operations Manager: Gina Kanouse Senior Marketing Manager: Julie Phifer Publicity Manager: Laura Czaja Assistant Marketing Manager: Megan Colvin Cover Designer: Alan Clements Managing Editor: Kristy Hart Project Editor: Betsy Harris Copy Editor: Keith Cline Proofreader: Dan Knott Senior Indexer: Cheryl Lenser Compositor: Jake McFarland Manufacturing Buyer: Dan Uhrig ©2010 by Pearson Education, Inc. Publishing as FT Press Upper Saddle River, New Jersey 07458 FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or special sales. For more information, please contact U.S. Corporate and Government Sales, 1-800- 382-3419, [email protected]. For sales outside the U.S., please contact International Sales at [email protected]. Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners. All rights reserved. No part of this book may be reproduced, in any form or by any means, with- out permission in writing from the publisher. Printed in the United States of America First Printing March 2010 ISBN-10: 0-13-700610-1 ISBN-13: 978-0-13-700610-6 Pearson Education LTD. Pearson Education Australia PTY, Limited. Pearson Education Singapore, Pte. Ltd. Pearson Education North Asia, Ltd. Pearson Education Canada, Ltd. Pearson Educatión de Mexico, S.A. de C.V. Pearson Education—Japan Pearson Education Malaysia, Pte. Ltd. Library of Congress Cataloging-in-Publication Data Westhoff, Patrick C. (Patrick Charles), 1958- The economics of food : how feeding and fueling the planet affects food prices / Patrick Westhoff. p. cm. Includes bibliographical references. ISBN-13: 978-0-13-700610-6 (hardback : alk. paper) ISBN-10: 0-13-700610-1 (hardback : alk. paper) 1. Food prices. 2. Biomass energy. 3. Agriculture--Economic aspects. I. Title. HD9000.4.W47 2010 338.1'9--dc22 2009042440 In memory of Trisha Westhoff Yauk. We miss you, Sis. Contents Introduction: What Goes Up… . . . . . . . . . . . . . . . . 1 Chapter 1 Biofuel Boom . . . . . . . . . . . . . . . . . . 9 Chapter 2 Tell Me the Oil Price . . . . . . . . . . . . . 35 Chapter 3 Policies Matter . . . . . . . . . . . . . . . . . 55 Chapter 4 Rain and Grain . . . . . . . . . . . . . . . . . 81 Chapter 5 Money in the Pocket, Food on the Plate . . . 97 Chapter 6 Food Appreciation and Dollar Depreciation . . . . . . . . . . . . . . . . . 115 Chapter 7 Speculating on Speculation . . . . . . . . . 129 Chapter 8 Stuff Happens . . . . . . . . . . . . . . . . . 143 Chapter 9 A Longer View . . . . . . . . . . . . . . . . 157 Appendix Food 101 . . . . . . . . . . . . . . . . . . . 181 Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . 215 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 iv Acknowledgments Many people made this book possible. Editor Jim Boyd first contact- ed me about the idea of writing a book concerning the world food cri- sis. Without his guidance and patience, this book would never have been completed. I have been very fortunate to work with him and the entire team at Pearson. This work grew out of my work with the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri. Willi Meyers, Abner Womack, Scott Brown, Lori Wilcox, Wyatt Thompson, Seth Meyer, Julian Binfield, and the rest of the FAPRI staff provided most of the good ideas and gave me the time I needed to work on the project. Colleagues at Iowa State University, Texas A&M University, the U.S. Department of Agriculture, the Congressional Budget Office, the Organization for Economic Cooperation and Development, the U.N. Food and Agriculture Organization, and FAPRI-affiliated insti- tutions in Ireland, the United Kingdom, South Africa, South Korea, and Mexico helped to shape my thinking about food markets. Michael Thomsett and Greg Karp offered very helpful comments and sugges- tions on an earlier draft. Although many people contributed to this book, none of them are responsible for the remaining errors. All opinions expressed are mine, and not necessarily those of FAPRI or the University of Missouri. Finally, special thanks to my family. This book could not have been written without the love and support of my wife, Elena, and our children, Christina, Ben, and Maria. v About the Author Patrick Westhoff grew up on a small dairy farm in Iowa, just a few miles from the “Field of Dreams.” He earned an undergraduate degree in political science from the University of Iowa and then spent two years in the Peace Corps in Guatemala, working with small-scale farmers. After getting a master’s degree in Latin American studies from the University of Texas, he moved back to Iowa and earned a Ph.D. in agricultural economics from Iowa State University in 1989. From 1992–1996, he served as an economist with the U.S. Senate Committee on Agriculture, Nutrition, and Forestry. He worked on several major pieces of legislation, including the 1996 farm bill. Westhoff has spent most of his professional career studying agri- cultural markets and policies with the Food and Agricultural Policy Research Institute (FAPRI), first at Iowa State University and now at the University of Missouri. FAPRI analysis is used by the U.S. Congress, the United Nation’s Food and Agriculture Organization (FAO), the Organization for Economic Cooperation and Development (OECD), and national institutions in Europe, Asia, Africa, and Latin America. In November 2007, he was named a co- director of the FAPRI unit at the University of Missouri (MU). The author also teaches and advises graduate students in the MU Department of Agricultural Economics. vi Introduction: What Goes Up... Everyone eats, and billions of people around the world work in agri- culture and related industries. Food prices are important to everyone and literally a matter of life and death for some. The prices we pay at the grocery store depend on everything from the weather in Iowa and India to the types of fuel we put in our cars in London and Los Angeles. Economic growth in China affects the price of a pizza in Chicago. Understanding why food prices rise and fall can help us anticipate and react to future market developments. It can also help us make important decisions as a society about how best to feed and fuel the planet. For many years, food prices did not get a lot of attention. From 1991 to 2006, U.S. consumer food prices increased just 2.5 percent per year, slightly less than the overall inflation rate.1 Crop and live- stock prices varied from year to year, but with little overall trend. Food prices got a lot of attention in 2007 and 2008. Front-page stories highlighted a sudden rise in food prices and a December 2007 cover story in The Economist proclaimed “The End of Cheap Food.” U.S. consumer food prices rose 4 percent in 2007, the largest increase since 1990, and the rate of food price inflation jumped to 5.5 percent in 2008. The surge in prices of basic staples was even more dramatic. Corn prices more than tripled between the fall of 2005 and the sum- mer of 2008.2Prices for wheat, rice, soybeans, and many other staple foods also rose sharply. The rise in food prices was a concern in the United States, but a crisis in much of the developing world. The average U.S. family of four spent $8,671 on food in 2007,3 and rising food prices made it harder for families to make ends meet. In low-income countries, the average family may spend half or more of its income on food. Sharply 1 THE ECONOMICS OF FOOD higher prices for staple foods meant low-income families were faced with a stark choice of eating less or cutting back on other necessities. The Food and Agriculture Organization estimates that millions of people were added to global hunger rolls in 2007 and 2008, leaving 915 million people undernourished. The world economic crisis could push that number over a billion in 2009.4 What goes up can come down. Just about the time many people became convinced that high food prices were here to stay, prices for grains and other crops retreated. Traders from around the world use futures markets to make or hedge bets about current and future prices for food and other products. Wheat futures prices reached record highs in March 2008, corn peaked in June, and soybeans in July. By late October 2008, wheat and corn futures had declined by more than 50 percent from the high, and soybean futures had dropped almost as much.5 After peaking in June 2008, FAO’s food price index fell by one-third over the next six months.6 What hap- pened? After years of stagnation, why did food prices suddenly explode and then collapse? Was this just a short-lived crisis, or are higher food prices and all their consequences likely to be the norm in the years ahead? Journalists, policy makers, and economists have tried to explain the rapid changes in food prices. Some have provided well-reasoned analyses that carefully identify and weigh the many contributing fac- tors. Others have tried to reduce the complex story to a sound bite, often to make a political point. A lot of information is available, but it is not easy to separate the information from the misinformation. Increasing amounts of corn, sugar, vegetable oil, and animal fats are used to make ethanol and biodiesel, two biofuels that can be used to fuel cars and trucks. The role of biofuels in the increase in food prices has been especially controversial, and the debate has often gen- erated more heat than light. Some have laid much or even most of the 2 INTRODUCTION: WHAT GOES UP... blame for higher food prices on the growth in biofuel production in the United States and Europe. The more grain and vegetable oil is used to produce these biofuels, the less is available to feed people, biofuel opponents argue, andthe losers in this food versus fuel battle have been food consumers around the world. Often quoted was a note by a World Bank economist that suggests the increase in biofuel pro- duction directly or indirectly accounted for 70 percent to 75 percent of the recent increase in food prices.7 On the other side of the argument, biofuel defenders point to a variety of benefits of the industry and contend that the role of biofu- els in raising food prices is minimal. The share of the world’s crops used to produce biofuels remains very small, they point out, and farm- ers around the world can and will increase production to satisfy the demand for both food and fuel. Former U.S. Secretary of Agriculture Ed Schafer frequently claimed that increased corn-based ethanol pro- duction only accounted for 3 percent of the increase in global food prices.8 The actual impact of biofuels on food prices was almost cer- tainly greater than biofuel proponents would like to acknowledge, but less than biofuel opponents claim. This book makes sense of the various arguments about recent swings in food prices. Was the run-up in food prices a fluke, or a sign of things to come? Understanding what happened and why may affect how we spend and invest our money, and determine the types of pub- lic policies that make sense. Even if it is not possible to develop a per- fect forecast of future food prices, it is helpful to identify some warn- ing signs that prices are likely to rise or fall. Given the size and complexity of the world food system, the list of forces that determine the price of food is incredibly long. This book is not intended to examine every aspect of the issue, but instead focus- es on a few of the most importantfactors: 3

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