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The 2008 food crisis--How it happened and how we solve itAbout a month ago, various news services reported on American retailers limiting the amount of bulk rice customers could purchase. That was, perhaps, when it really hit home. World food price increases had been lurking on the back pages of the business section for months. But finally, the food crisis had done the unthinkable--it arrived on American shores. The CPI Food Index jumped nearly 7 percent so far this year, which comes on the heels of a 5 percent increase from 2007. Prices for raw food commodities, such as corn, wheat, and soybeans, have increased exponentially from earlier in this decade. The amount of attention the story generated is not surprising. Food prices are perhaps the only item people from any and every social strata can relate to. How did it come to this? Ethanol and other renewable fuels were immediately fingered as the prime suspect. But biofuels are only one small drop in a very large bucket. A study published by Informa Economics found only a +0.3 percent increase in food prices from a $1 rise in corn. From late 2005 to now, the price of corn has increased $4--which means the ethanol boom would be responsible for only 1.2 percent of food inflation. The Linn Group, a Chicago-based trade house, estimates that in 2008 farmers reaped only 20 percent of the money spent on food. In 2004, the USDA projected the farmer's share at 19 percent. In an 18 oz. box of corn flakes, the value of the corn inputs amount to less than $0.09. The major culprits in food price inflation are higher transportation costs, increased world demand, and lax government policies. Transportation is the most dramatic--which now accounts for $0.20 out of every $1 spent on food. The energy costs of producing food are up a staggering 150 percent in four years. With several prominent analysts predicting $200 crude oil on the horizon, the pain of food price increases is likely far from over. Consumption of food, particularly in emerging economies, is expanding rapidly. Not only is the world's population increasing, the amount of this population that can afford more and better food is also jumping. India and China, which account for roughly one-third of the world's people, has seen per capita meat consumption more than double since 1980. Not only are there more mouths to feed, but there is less arable land to supply the food. Per capita grain production in both India and China have either declined or leveled off in the last decade. Consistently low food input costs throughout the early 2000s and the late 90s seduced many governments into giving up large government stores of food and grains. Increasingly, food importers began living hand-to-mouth, buying exactly what they needed when they needed it. As a result, many countries were totally unprepared when a series of crop failures. World stocks-to-use ratios are at modern-day lows of 16 percent this year; in 2000, this estimate was at 34 percent. No measure could be more self-defeating than to use recent farm prosperity as an excuse to cull farm subsidies. The supply crunch in food illustrates just how much we need our nation's farmers. We must continue to support them in their lean times to maintain consistent production. Two years of high prices are not enough to make up for nearly two decades of weak profitability. Payments and supports to farmers account for only 13 percent of the proposed $289 billion U.S. farm bill. Many farm aid provisions activate only when prices fall below a certain level, ensuring most assistance will not even be spent at current farm prices. Instead of throwing the baby out with the bath water by removing the farm safety net, politicians must work to trim unnecessary supports. A quick and easy way to reduce the ire of the American taxpayer would be to place more stringent income caps on those who receive subsidies. On a related note, policy-makers should not make ethanol the scapegoat. The actual government support for ethanol is minimal; producers receive no direct subsidies from the federal government. The oft-cited policy in question is a 51-cent blender's credit, which is paid directly to gasoline blenders to encourage consumption. Reducing costs at this key stage in the fuel supply chain results in a substantial savings at the gas pump. Ethanol now accounts for 5 percent of all U.S. fuel consumption. Take away ethanol and the price of gasoline would jump anywhere from $0.25 to $1.00 per gallon, according to energy analysts. Often, a serious crisis is necessary to force reluctant policy-makers to confront a failed policy. Record commodity values should fix many of the problems in the world food delivery system by encouraging investment in local production. Governments must do their part by examining how food aid is distributed and provide appropriate price supports for domestic producers. Finally, soaring oil values will finally push law-makers to create a coherent national energy policy. More money must be allocated to study and expand renewable forms of energy, such as wind, solar and next generation biofuels. In the interim, ethanol and natural gas can be utilized as a tool to wean us off our addiction to oil imports. Helping ourselves--and by extension, the world--to feed itself is a challenge we have an obligation to meet. --Jerrod Kitt, Research Analyst, The Linn Group, Chicago, Illinois 5/26/08 Date: 5/21/08
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