Explaining the steep rise in Food Prices

by Dave

The Standard
Interpreting these drivers becomes a useful exercise in deciding whether or not food prices are genuinely in a longer term bull market or not.

Driver number one: The number of mouths to feed. Clearly, this number is rising.

However, rising populations do not in isolation support an extended bull run in prices. Food has a relatively “short run elasticity of supply” feature in that if prices rise because of supply needs, farmers are quick to plant more crops.

This supply-demand elasticity is longer with, say, base metals because of the time it takes to recover the material from the ground.

Driver number two: Rising wealth of populations is a factor that works with driver one to complicate the supply/demand factor.

A key part of impending resource scarcity is blamed on the rise in per capita consumption. From a food perspective, one trait that surfaces is the change in diet from cereal consumption to meat consumption.

Asian palates have grown since 1990 from 16.7 kilogram per head of meat per annum to 27.8 kg per head.

Importantly, this trend has a leveraged effect on the need for grain as it takes 7 kg of feedstock grain to produce one kg of beef.

Driver three: Largely a US phenomenon at present but capable of becoming global: the 2007 US Energy Act is committed to a fourfold increase in biofuel output by 2022.

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