The Price is Right

I've been reading a lot about the current economy, partly because so much is going on now, mostly because I work in a financial institution. During the course of my readings, I found out a lot about what's driving the Global Food Crisis, which I thought I'd share with you.

Essentially, the high prices of the food that you're seeing whenever you go out is caused by 3 things:

1. The price of oil & the green revolution
2. Global economic growth

The Price of Oil & the Green Revolution

Most people wouldn't think that the price of oil would impact the price of food so much, or that the green revolution could have any adverse impact. The ugly truth is that the Green Revolution may cause thousands to go hungry. Here's how it works:

The input for food is fertiliser. Fertiliser depends on natural gas. The price of natural gas is related to the price of oil for obvious reasons. Therefore, if the price of oil skyrockets, so does natural gas, and so does food.

Another way it works is:

The price of oil affects anything that depends on transportation for its success. Food needs to be transported. Therefore, if the price of oil increases, so does the price of food.

So how does the Green Revolution cause the hunger of a nation? Chew on this:

The Green Revolution promotes the use of biofuels (among other alternatives) as opposed to oil in order to wean the world away from a pollutive way of life and a dependence on a non-renewable source. But what are biofuels?

From Go Green Virginia: Biofuels are any fuel derived from biomass. Agricultural products specifically grown for conversion to biofuels include corn and soybeans

Biofuels are essentially made of food. Corn and soybeans are the staple diets of (to my knowledge) South American and other corn-producing countries, just as much as rice is to Asia. Incentives for biofuel production are drawing farmers away from using land to produce food to using land to produce biofuels. This has resulted in lower food production as a whole.

While biofuels aren't the only alternative to oil, the Green Revolution, coupled with misinformed well-meaning consumers and the rush by companies to 'Go Green' have affected the price and supply of food.

Global Economic Growth

So what does this mean to you? Surely the price of oil and the Green Revolution makes no difference to you being able to eat nasi lemak for breakfast everyday. Wrong.

Economics 101: A shortage of supply of any product in relation to demand will result in an increase in price.

Newsflash: The price of food today is twice as high as it was at the start of 2008.

The cause of this was mostly global economic growth, especially in emerging economies such as China and India. Demand has been outpacing supply since 2003. Global stocks of food have been declining since 1999. The limited supply has resulted in volatility in the price of food as it gets more reactive to small shocks, such as rice export bans in major rice exporters such as India and Vietnam.

The Global Food Crisis

The main points that I'm trying to make is that (1) the price of food is increasing, and is unlikely to decrease substantially anytime soon until the world replenishes the supply of stocks, and (2) the supply of food is relatively low.

Admittedly, this doesn't affect how I eat. I'm still stuffing myself silly. But let's take a moment to think about how this will affect the hardcore poor living on the UN World Food Programme, who recently declared a state of emergency. Let's think about the victims of the Vietnam floods. I know, I'm all sunshine, aren't I?