In recent years, the world market has seen an increase in prices for most agricultural products and food. It is possible to define this increase as a combination of long-term and numerous short-term factors. Above all, it is the increased demand for food pushed by the economic growth in the developing countries as well as the unfavourable weather in various countries – the key producers of agricultural crops. All these factors have had a negative impact on global food supplies and contributed to price growth on agricultural products. The aim of the paper is to analyze the modern state of the world food situation and highlight the reasons of the crisis in this area affecting the continued existence of civilization.
The Notion of the Crisis
The global food problem can be characterized by a number of features. Firstly, it is comprehensive in nature. The food problem affects countries and the peoples of all regions of the world. This problem has direct relation to the demographic, environmental, energy, and raw material problems. Its aggravation is associated with strengthening of these problems. Currently, worsening of the food situation is increasingly related to the factors that go beyond the actual agricultural and agrarian relations in both developed and developing countries. The essence of the world food problem is revealed through the contradictions between socio-economic and political conditions of production. Its economic aspect lies in the creation, development, and successful functioning of a material base for food production to meet the growing needs of human society.
In 1996, in Rome, the first World Food Summit took place. Its final resolution stated that food should not be used as a tool for political and economic pressure. Nevertheless, nowadays, problems associated with the food remain unresolved. Governments of various countries attempt implementing different measures to solve the problem with food. The severity of the modern food crisis is different in various countries. However, most countries in the world have already become aware of the rising of food prices. Since the beginning of 2000, consumer prices have increased almost by one and a half. Since 2003, the international prices of a wide range of commodities have surged upwards in dramatic fashion, often more than doubling within a few years, in some cases even within a few months.
FAO expressed concerns about a sharp rise in the price of bread, rice, maize, vegetable oil, beans, and other basic food products. Its experts argue that in 2010, the cost of the poorest countries on cereal imports rose by 56% as compared with the previous year. They drew attention to the fact that the rise on prices for food and energy, as well as conflicts and natural disasters, led to the fact that 37 countries were in a difficult situation and in need of urgent food assistance. In their report, Haytmanek and McClure state that “the increase in food prices posed a heavy burden on consumers in food-importing countries”. Governments respond to this situation by the adoption of a series of provisional measures. They include the establishment of export quotas and price controls, reduction of import duties on food products as well as abolition of taxes and implementation of subsidies for agricultural production. These measures are aimed primarily at reducing domestic prices through the better supply of the local market. Many countries that have supplied their agricultural products abroad have decided to limit their exports in order to increase the supply on the domestic market. Leading rice exporters including Egypt, India, and Brazil have banned their rice exports. Although according to many forecasts, in the near future, rice prices should decrease due to the fact that countries producing rice increase the areas under this crop and increase production.
The Scale of the Problem
Since the beginning of the 2000s, consumer prices around the world have increased by almost one and a half times on the average. The overall difference compared with the beginning of the century will almost double. Global stock prices of basic food commodities such as wheat and rice have hit new records and overcome psychological barriers. According to the World Bank, since 2006, the growth of food prices, in general, is close to two-fold.
There are three main reasons that lead to an increase in food prices around the world. The first reason is the increase of the demand for food on a global scale by improving the general well-being. The second reason is higher energy prices. This fact leads to the increase in the cost of fertilizers, transport, and storage of agricultural products. The third reason is the use of a large part of agricultural products for biofuels. These reasons are highlighted in recent publications and researches on the issue of agro-inflation. Many international organizations of the UN system try to find a solution to these issues.
Many countries, particularly the developing ones, actively use a trade and political arsenal of measures to solve the food problem. For example, for the first time in the history of the world grain market, the price of a ton of rice has reached a thousand dollars in the ever-growing demand and the systemic crisis of the production. Some exporting countries fearing shortages of rice on the domestic market have imposed restrictions on the supply of the product abroad. India has imposed quantitative restrictions, China – export duties, and Vietnam and Egypt – temporary ban.
The Dependence of Oil and Food Prices in the United States
In the United States, the cost of basic food products increased significantly despite the extremely low inflation. One of the first reasons for such dynamics can be called deterioration of weather conditions, namely drought affecting the southern states. It has an extremely negative impact on the harvest. In addition, there is the improvement of the middle class in the country as well as the continued stimulating policy that promotes the growth of liquidity in the country, eventually increasing product prices. Undoubtedly, these factors affect the cost of food. However, at the same time, the schedule of changes in prices for products almost completely repeats the motion of graphics of the cost of a barrel of crude oil Brent.
This correlation between oil prices and food products is connected with the fact that for the manufacture of any food product, it is necessary to have transportation, specialized devices, chemicals, and other products, the cost of which depends entirely on the price of oil. Prices of food produced by oil-dependent industrialized agriculture have risen sharply. It is safe to note that oil is a key commodity. Changes in oil prices have a colossal impact on the average consumer. This situation is typical not only to the United States.
Most experts associate a sustained recovery of the US economy with the ongoing programs of quantitative easing. However, it should also be noted that the pumping of the national economy with the unprecedented amounts of liquidity has contributed to a sharp rise in fuel prices since the USA is the largest consumer of oil in the world. On the one hand, the increase in the volume of supply of liquidity on the market has contributed to the growth in consumer spending. However, largely, the rising oil prices compensated the purchasing power as this dynamic has provoked an increase in the cost of food, which primarily hits the pocket of consumers.
Low oil prices as well as low-interest rates are a motivating factor for the economy. Given the fact that there is no cheap oil on the market and probably will not be in the coming years as the deposits are exhausted so it is necessary to use more capital-intensive methods of production and demand is growing rapidly, the Federal Reserve System is forced to maintain very low interest rates. However, as mentioned earlier, cheap liquidity promotes the growth of oil prices and hence – food.
Economic Reasons for Rising Food Prices
Many experts affirm that the reason for increase of food prices worldwide is the factors of growing demand and decreased supply. The rise of population has produced demand for finished goods and crops from different parts of the world. Thus, it influenced prices. Prices are related to supply and demand. When demand for a product increases on permanent supply, prices always rise. The same thing has happened with food prices. The most populated countries around the world create demand for food. The quantity demanded is inversely related to the price. The higher the price of a commodity is, the less people are willing to buy this commodity. Conversely, the lower the price is, the greater the amount of goods purchased is. In such a way, increased prices for food products are the reason for decrease in the ability of buyers to buy products. In such a way, with higher prices, many people cannot afford to buy food products. The presence of substitute products is a factor that affects the elasticity of demand. The more there are substitutes of the product, the more opportunities for the buyer to refuse it are present, the larger elasticity of demand for goods is. Substitutes are characterized by the fact that increases in the price of one commodity causes the increase in the consumption of another. For example, the increase of rice prices causes the increase in consumption of grain products. However, the increased consumption of grain products causes gradual increased prices on these products.
Reasons for Food Shortages in the World
Instability and, at times, sharp fluctuations in energy prices, increasing production of biofuels from food crops, and the growth of the overall consumption of cereals in India and China became the base reason of an aggravation of the food situation in the world. Along with them, there are a number of factors affecting not so sharp but substantially preventing the return of the global agri-food system in a state of equilibrium. They include the increasing intensity of the use of natural resources approaching towards the absolute limit, beyond which it does not provide the growth of productivity or even lead to a drop in yields. To preserve the former high yields, it is necessary to use more fertilizers. The drop in soil fertility, erosion, and acceleration of gullying caused by unskilled or excessive use of land undermine the very foundations of agriculture. All these factors lead to the increase in food prices.
Depletion of natural resources is particularly evident in the growing water scarcity. It is known that 70% of water consumption is accounted for irrigation. The desire to increase agricultural production without taking into account the possibilities of nature to heal itself threatened the depletion of groundwater. Nowadays, the level of groundwater drops in countries where half the world’s population lives, including the three major grain-producing countries – China, India, and the United States. It is especially dangerous for India and China, since, from irrigated areas, 60 and 80 % of grain is obtained. Saudi Arabia intends to abandon grain production by 2016. The level of groundwater under the North China Plain, which produces half of wheat and a third of maize, decreases rapidly. The waters recede deeper at a rate of three meters a year.
Environmental pollution has a negative impact on agriculture as a result of the human economic activity, industrial and agricultural production, chemicals, increased use of road transport, heating of cities, and snowballing increase of wastes. Not only does it poison the soil near the cities and railways but also increases the emissions of the so-called greenhouse gases – carbon dioxide, methane, and others, which are the main reason for the overall climate change. In addition to environmental changes, these factors are the reason of the increase of food prices.
Nowadays, the global economic crisis is a great concern for all countries worldwide. All countries experience the increase of food prices. This increase is associated with the number of reasons. The first and the main reason, according to many experts, is the relation of oil and food prices. This conformity between food products and oil prices is related with the fact that for the production of any food product, it is necessary to have transportation, devices, and chemicals, the cost of which depends increasingly on the price of crude oil. Several other factors have a negative impact on the harvest. They include droughts, environmental pollution, and depletion of natural resources. One more reason is the increased demand for food pushed by the economic growth in developing countries. All these factors have a negative impact on the food prices.
This abstract was written by Kate Fox on demand of https://exclusivepapers.net/.
