Between 1974 and 2005, food prices around the world dropped by 75 percent, in real terms. After two decades of steadily falling prices, it seemed that the trend would continue indefinitely. But then something amazing happened: Between 2005 and 2007, global food prices increased by 75 percent.
The result is agricultural inflation, or what some experts are calling agflation.
In 2007, U.S. food prices increased by about 5 percent. This is twice the rate of the previous year and the highest increase since 1990. Worse, many economists believe that food prices will continue to rise for several years. According to Benjamin Senauer, co-director of the Food Industry Center at the University of Minnesota, “The days of cheap food may be over.”
Why are prices rising? There are three primary reasons:
- More crops are being converted into fuel.
- The increase in oil prices causes food prices to go up.
- Demand is increasing from consumers around the world.
The biggest reason for agflation is the growing use of ethanol in gas tanks. The U.S. plans to use 7 billion gallons of renewable fuels annually by 2012. According to the Chicago Tribune,1 ethanol now uses 25 percent of the nation’s corn crop, and the once-abundant supply can’t keep up with the demand. The Economist2 reports that when a driver fills up an SUV with ethanol, he is consuming enough corn to feed one person for an entire year. While corn typically stayed under $3 per bushel for the past decade, in 2007 the cost soared beyond $4 a bushel.
The result? Rising prices not just for the corn crop, but for all of the food products that rely on it, such as breakfast cereal; cooking oil; meat, poultry, and dairy products, which depend on corn for feed; and even products that do not seem to contain any corn, such as soft drinks sweetened with high-fructose corn syrup.
Because corn has become such a lucrative crop, farmers have planted more corn and less of other crops, such as soybeans. This cutback in supply has caused soybean prices to increase. At the same time, soybean demand has gone up, because the crop is increasingly used to produce biodiesel fuel.
Another reason for increasing food prices is that transportation costs are climbing steadily. The price of oil doubled in...
