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The End of Cheap Food?

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THE PROGRESSIVE REVIEW - April 24, 2008
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The End of Cheap Food?
By Mary Kane
The Washington Independent

High cost of commodities will continue to hit developing 
world hardest. 

A sharp spike in prices for wheat, corn, rice and other 
staples has sparked riots in Mexico and Egypt, marches by 
hungry children in Yemen and the spectre of starving people 
in Haiti turning to mud pies for sustenance. This growing 
unrest is forcing the global community to focus on the 
causes of higher food costs and what can be done. But it's 
also raising the troubling possibility that cheap prices 
for food may be gone for good, an economic relic of the 
the past. 

That scenario would be disastrous for the progress of 
fighting poverty in poor countries - and it would threaten 
to halt a long period of rising living standards in the 
United States tied directly to the inexpensive cost of 
food. 

"Don't look now, but the good times may have just stopped 
rolling," the economist Paul Krugman wrote in his New York 
Times column. The Economist was more strident: "The era of 
cheap food is over," it declared. World Bank President 
Robert Zoellick, reaching back to policies created during 
the Great Depression for inspiration to address food 
inflation, is pushing a "New Deal" for global food policy, 
aimed at aiding impoverished countries with income support 
and help in producing crops. 

The gloom-and-doom outlooks are prompted by rising prices 
for commodities, which started increasing steadily in 2001 
before suddenly soaring recently. Wheat prices have gone 
up by 181 percent over the past three years, according to 
the World Bank; food prices around the globe have risen 
by 83 percent during the same period. In March, rice prices 
hit a 19-year high. Corn prices recently rose from $2.50 
a bushel three years ago to $6, for the first time. 
Zoellick has predicted a sustained period of higher food 
costs, saying he expects prices to remain elevated through 
next year and stay above 2004 levels for at least the next 
seven years. 

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The causes are many. India and China have growing 
populations and are becoming more prosperous; more people 
can now afford to eat more meat, and the demand for animal 
feed has grown. In the U.S. and Europe, a boom in biofuel 
as alternative energy is diverting considerable amounts of 
corn from the market. A severe drought in Australia has 
contributed to a 25-year low in supplies. Some also blame 
speculation in the commodity markets for sharp swings in 
prices and availability. 

While plenty of people are worried about the end of cheap 
food, it's not clear yet whether that will happen, said 
David Orden, senior research fellow with the International 
Food Policy Research Institute. Things like the weak dollar 
becoming stronger, crop shortfalls easing, energy prices 
stabilizing and strong growth in the world economy are all 
factors that could affect the availability of food, he 
said, and no one's sure how they will play out. "We just 
don't know yet," Orden said. "Before this bump in food 
prices started, people were not predicting it." 

What has become clear is that in a short time, soaring food 
costs have shaken some long-held assumptions about food and 
fuel, especially in the U.S. 

Food has been cheap in America for nearly 60 years, and 
Americans set aside less of their incomes for food than any 
other country in the world, devoting just 11 percent of 
disposable income to it, compared to double that percentage 
in Europe. Keeping food costs low has been one of the great 
economic achievements of the last century. The low food 
costs, combined with rising incomes, "have been two of the 
primary sources of prosperity for American consumers," said 
John Urbanchuck, an agriculture industry analyst for LECG, 
a global consulting firm. 

Until now, Americans had the luxury of worrying about food 
due to its abundance. Concerns have centered on childhood 
obesity and an epidemic of diabetes. But new problems with 
food are already surfacing, as rising prices begin showing 
up at the grocery store. More expensive corn means people 
pay more for eggs and poultry, and still higher meat and 
milk prices are on the horizon. Record high oil prices are 
adding to price pressures, since transporting food costs 
more. 

If prices stay high for a long time, the poor will be hit 
the hardest, since they spend the largest percentage of 
their incomes on food. Efforts to reduce hunger, like food 
stamps and free and reduced lunch programs, will become 
more costly, said Otto Doering, a professor of agricultural 
economics at Purdue University in Indiana. Asking taxpayers 
to pay more for them won't exactly be politically popular, 
since food prices could also take a greater bite out of 
middle-class budgets. And paying more for food will mean 
having less to spend on things like big-screen television 
sets and iPods, putting a dent in the kind of consumer 
spending that has kept the economy growing for the past 
two decades. 

Consumers won't be the only ones feeling the squeeze. 
Hog producers in the Midwest expect to lose hundreds of 
millions of dollars in just the next six months due to 
corn price hikes, Doering said. 

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It could get far worse. Another "hidden issue" is the 
scarcity of land still available for farming, he said. 
In the past, the United States had plenty of farmland 
to provide more crops as food demands grew. But land is 
finite, and after all these years, we're beginning to 
run short, Doering said. "For the first time in our 
history, we're pushing up against the edge in terms of 
quality land," Doering said. "We're in a somewhat fixed 
box." 

Because of all this, Doering said it's not clear whether 
the U.S. can keep food prices low. "It's a whole new 
ballgame," he stated. 

The United States has endured temporary price bumps before. 
A spike in commodities in the early 1970s was due mainly 
to bad weather around the world, and to huge and secretive 
Russian grain purchases. In 1995-96, food inflation stemmed 
from a Midwestern drought, global demand for U.S. feed 
grains and speculation. In both cases, prices settled back 
down again. 

This time around, the biofuel boom is also complicating the 
question of whether prices will revert. Some one-third of 
the U.S. corn crop now is devoted to ethanol production, 
its growth due to a combination of high oil prices and 
generous government subsidies. When corn prices were lower 
a few years ago, ethanol was seen as a popular energy 
alternative. Now it's a target. 

Zoellick, the World Bank president, made headlines for 
blaming biofuels for recent price hikes, saying earlier 
this month that biofuels are a major factor in the world's 
added demand for food. Biofuel mania, or speculating in 
commodities by hedge fund and traders betting on corn 
prices, was also responsible for shortages and price 
increases, he said. 

His remarks added to an already simmering debate. Last 
summer Foreign Affairs magazine published "How Biofuels 
Starve the Poor," which reiterated that sentiment, noting 
that filling the 25-gallon tank of a sports utility vehicle 
with pure ethanol required 450 pounds of corn, or enough 
calories for one person for a year. 

At some point, American policy-makers are going to have to 
decide whether they want to live with an "expensive food 
policy" that requires continuing to produce large 
percentages of corn crops for biofuel and enduring higher 
prices for other foods, said Bruce Babcock, an Iowa State 
University economist. 

The food debate will eventually break down into two camps: 
Those who believe supply and demand are the problem, and 
that the world can't produce enough to meet the needs of 
growing economies; and those who blame ethanol production. 
In the end, Babcock predicts, Washington will continue 
to support ethanol production in the near term, before 
imposing caps on its production.

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But the future for food prices will still remain uncertain, 
because the global market is so complex. "I don't think 
we've ever been where we are right now," Babcock said. 

Should prices stay high, the effect will be felt most 
keenly in developing countries, as the recent food riots 
have shown. Impoverished families now pay 50 percent to 
80 percent of their incomes for food. Continuing high 
prices for oil and corn threaten to undo any gains in 
reducing poverty made over the past decade, Zoellick 
said. 

Josette Sheeran, head of the U.N.'s World Food Program, 
told The Economist that the effects of higher food prices 
in poor countries will be devastating: 

"For the middle classes, it means cutting out medical 
care. For those on $2 a day, it means cutting out meat 
and taking the children out of school. For those on $1 
a day, it means cutting out meat and vegetables and eating 
only cereals. And for those on 50 cents a day, it means 
total disaster." 

It wasn't supposed to be this way. The promise of 
globalization was that it could lift living standards for 
everyone. But if the world's hungry still can't be fed 
because food is no longer cheap, it's an empty promise. 

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