Food price myths

Food prices in the Group of Seven economies rose by nearly 3 per cent year-on-year in the 12 months to July 2007, and in emerging economies by 10.5 per cent. However, they have not risen uniformly, either at the commodity or retail level. One reason is that, unlike in, say, metals, producers tend to boost output when prices of a particular crop go up, so that price rises in any one agricultural commodity tend to be transitory.

The changing diet in the developing world also seems unlikely to be responsible for more expensive food. For a start, rising demand globally is typically more than offset by productivity gains - in the past yields have gone up at the same time as real prices have fallen. Overall food demand, in any case, seems to be rising rather more moderately than in the mid 1990s, perhaps because world population growth has slowed.

Similarly, the impact of biofuel may be overstated. The diversion of crops to biofuel production may have reduced the supply of food. But the contribution of this to higher food prices has perhaps been exaggerated. The Organisation for Economic Co-operation and Development says the supply shortfall of cereal in North America, Europe and Australia in 2006 was nearly four times greater than the increase in cereal use for ethanol.

Transitory factors such as weather and animal disease seem to bear the prime responsibility for recent food price inflation. Of course, long-term secular changes in food demand and production do matter. The impact of climate change or the declining availability of arable land globally is as yet unknown.

But policy responses may play as significant a role. Trade liberalisation, for example, has considerable potential to increase food supply and contain price pressures. Public policy in the developed world, after all, has encouraged high, even excessive, food production for most of the past 50 years. As recent "tortilla riots" in Mexico show, if prices rise too far, politicians will be forced to act.