Food Prices, in US, showed a rise of 4% in 2007 and the expectations for 2008 were fixed among 3.5% to 4.5 %.( Capehart & Richardson, 2008). This increase in food prices, in international market, is causing many nations to divert important resources for the procurement of the food items at much higher costs…
There are many reasons for this sharp increase in the prices of food especially and a valid economic justification may not be provided to accurately outline the factors behind the increase in the food prices.
Development of alternative fuel i.e. bio-diesel, low crop yields due to bad weather in major commodity producing countries as well as the higher demand from developed as well as emerging countries, all resulted into food inflation. Besides, the recession in US economy, one of the largest importers of commodities, is also cited as one of the major reasons behind the sharp increase in the food prices as there has been substantial crises being faced by US economy over the period of almost two years.
The increase in food prices can be traced back to last two years as FAO food Index rose by 9% in 2006 and 23% in 2007. (IFAD, 2008). This sharp increase suggests that there is a great increase in the prices of food items all over the world and many important factors are at play which is pushing the prices up. In order to make an economic analysis of this increase, we will outline and discuss different factors causing the prices to go up. (The World Bank, 2008)
There is a general increase in the concern being shown over the impact of greenhouse gases over the environment of the world. This, coupled with depleting oil resources of the world, has forced many developed nations to look for alternative sources of energy to fulfill the future energy needs of the planet. Bio-diesel is one such alternative which has been advocated as the potential replacement of oil as a source of energy.
However, this shift towards finding alternative sources has greatly increased the demand for the food items especially rice, sugarcane and corn -the commodities which are now heavily used in producing bio-diesel. This increase in quantity demanded for rice and sugarcane especially have seen a great deal of increase due to increase demand from developed countries. (Economist, 2007). It is also important to mention that increasing subsidies on ethanol in developed world have increased the overall demand for sugarcane because it's now being used for producing ethanol rather than sugar. (Buntrock, 2007)
It is also important to note that due to greater demand from developed world, developing countries, which are considered as the suppliers of basic food items in international market, started to export most of their produce resulting in strong shortage of the food commodities in their own countries. This shortage of essential food commodities, in developing countries, also put strong pressure on the prices to rise upward.
According to IFAD, the available stocks of the cereals at the start of the year were very low. This, coupled with the reduction in the overall output level of major cereals by 6.9% in 2006, suggested a reduced supply of essential cereals in the market. (IFAD, 2008). This has been mainly attributed to the bad weather in major producing countries i.e. Brazil, Thailand, India etc causing acute shortage of cereals in the market therefore putting pressure on prices to go up drastically in such short span of time.
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