Food Prices Increase: Causes and Solutions

Introduction

Food prices have increased significantly since 2006. The increase in prices was initially observed in key food crops such as corn, rice, vegetables, and wheat. However, the trend has also been observed in other non-food commodities in the recent past. The price of corn in the United States rose by 9% between 2011 and 2012 (Khan, Powell, & Wada, 2012, pp. 8-10). This increase is partly attributed to the fact that the cost of producing corn increased by 5.2% in 2011 (Khan, Powell, & Wada, 2012, pp. 8-10). The prices of beef and veal rose by 6% between 2011 and the first quarter of 2013 (USDA, 2013). By contrast, the prices of fresh vegetables rose marginally (2.5%) over the same period (USDA, 2013).

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Overall, the prices of various foodstuffs in the United States have increased by 15% in the last three years (USDA, 2013). In 2013, food prices are expected to increase by 4% (Pleven, 2013). The main factors that determine food prices include supply and demand dynamics, as well as, the cost of production and speculation in the commodity market. In this paper, the causes, consequences, and solutions to the problem of food inflation in the United Sates will be discussed. Rising food prices in the United States should be addressed because it increases poverty, poor health, and reliance on food imports.

The Causes of the Increase in Food Prices

The rapid increase in food prices since 2006 can be explained by several factors. First, the United States has experienced severe draughts that led to reduced food production. In 2013, food prices are expected to increase because of the draught that was experienced in the Midwest in 2012 (Pleven, 2013). Moreover, the draught led to an increase in the prices of animal feeds, thereby raising the cost of producing foodstuffs such as eggs, milk, and meat.

In 2011, the prices of cereals such as wheat rose significantly due to draught in the countries that export food to the United States. For instance, the 2010 draught in Russia, which is one of the leading exporters of wheat to the US, resulted into significant price increases (Pleven, 2013). As a result, commodity speculators increased their investments in foodstuffs in order to make profits from the rising prices. This led to high food inflation since speculators offered high prices to purchase various food commodities, which they later sold at higher prices in order to make profits.

Second, the rise in food prices can be attributed to the 2008/2009 financial crisis. The financial crisis caused huge losses in the stock market, by reducing the financial performance of most listed companies. In order to avoid loses, investors shifted their capital to the commodity market (Headey, 2010, pp. 375-391). The resulting increase in demand in the commodity market led to an increase in oil and gas prices, thereby increasing the costs of processing various foodstuffs.

For instance, oil is used to transport crops from farms to factories or to markets. Thus, an increase in transportation cost leads to an increase in the prices of processed food throughout the country. The costs of farm inputs such as fertilizers and irrigation equipment have also been increasing in the last five years (Headey, 2010, pp. 375-391). Consequently, farmers have had to increase the prices of their output in order to improve their returns on investments in farm inputs.

Third, the rise in food prices has been caused by the increased use of bio-fuels in the United States (Headey, 2010, pp. 375-391). The government provides subsidies to support the use of corn to produce ethanol. The use of corn as the main raw material in the production of ethanol rose significantly between 2006 and 2009 (Headey, 2010, pp. 375-391). Unfortunately, the production of corn did not rise sufficiently in response to the increase in its demand (IMF, 2013). Generally, the increased use of corn for production of bio-fuels leads to food shortages.

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Thus, prices have to increase in order to ration the limited supply of corn (Headey, 2010, pp. 375-391). The rise of corn prices also triggered an increase in the prices of other foodstuffs such as wheat and soybeans (Headey, 2010, pp. 375-391). Specifically, famers focused on producing corn at the expense of other food crops in order to benefit from the high prices. In order to motivate farmers to increase the production of other food crops, retailers and food processors have had to increase the prices they pay to famers (Pleven, 2013). Given the shortage in food supply, the high prices paid to farmers are transferred to consumers.

Finally, the increase in food prices is attributed to the food security and trade policies adopted in other countries. Large exporters of agricultural products have responded to the problem of food shortage by introducing restrictions on food exports through export bans and high taxes (Headey, 2010, pp. 375-391). These policies have reduced the supply of food in the United States, thereby forcing retailers to increase prices.

Disadvantages of Rising Food Prices

The rise in food prices has had adverse effects on thousands of households in the United States. To begin with, the rise in food prices is “one of the major factors that are exacerbating the problem of poverty and low economic growth in the country” (French, 2007, pp. 841-843). Specifically, food inflation has forced several households, especially, among the low-income earners to spend a large portion of their income on consumption rather than investments (French, 2007, pp. 841-843). Food inflation reduces savings since people have to spend more on foodstuffs. According to macroeconomic theory, investments are mainly financed through savings (Boyes & Melvin, 2010, p. 251). Thus, a decrease in savings as a result of high food prices reduces investments and economic growth in the US.

High food prices have adversely affected the health of thousands of citizens in the US. People who are not able to afford organic foodstuffs have had to consume cheap processed food that often contains genetically modified ingredients. Processed food products have low nutritional value (French, 2007, pp. 841-843). Besides, several studies have shown that genetically modified foods have severe health risks such as obesity (French, 2007, pp. 841-843). Generally, high prices have reduced citizen’s access to adequate food. This has led to low quality of life, and increase in diseases.

Implications of Rising Prices

The increase in food prices suggests that the country’s food security is at risk. Undoubtedly, price is one of the major factors that determine access to food in every country. In developed countries such as the United States, price is an important determinant of access to food since majority of the citizens are not directly involved in food production. Thus, they have to buy food from retailers who can prevent access through high prices.

The rise in food prices also indicates that the food production policies that are being implemented are not effective. Since price has an inverse relationship with demand, an increase in price means that food supply is not adequate (Besanko & Braeutigam, 2010). The dependency of the United States on imported food is also likely to increase due to the high food prices. In particular, citizens are likely to shift their expenditure to imported foodstuffs if they are cheaper than locally produced food.

Solutions

The measures that should be taken to reduce food prices include the following. First, the government should promote food production within the country. This can be achieved through incentives such as providing subsidies on farm inputs to reduce production costs (Headey, 2010, pp. 375-391). Moreover, research on agriculture should focus on developing alternative food production methods that can lead to reduction of the prices of food. The rationale of this strategy is that increased food production will offset the high demand, thereby reducing prices.

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Second, the government should rethink the use of corn to produce ethanol. In this regard, the government should focus on exploiting alternative energy sources in order to boost the supply of corn for consumption. The expected decrease in corn prices will also trigger a reduction in the prices of other foodstuffs such as wheat since famers will focus on diversifying their output by producing a variety of food crops to improve their earnings (Boyes & Melvin, 2010, p. 104).

Third, commodity speculation should be controlled. Although this strategy seems to contravene the principles of a free market economy, the benefits of regulating speculation on food commodities outweigh the profits made by the speculators (Boyes & Melvin, 2010, p. 150). Finally, the government should establish strategic food reserves to cater for shortages in food supply. Undoubtedly, insufficient supply is one of the major causes of food price inflation. This problem can be addressed if the government establishes national reserves for key foodstuffs such as cereals to prevent increase in prices during draughts (Headey, 2010, pp. 375-391).

Conclusion

Food prices have risen significantly in the US since 2006 due to several factors. These include the use of corn to produce ethanol, draughts, speculation in commodity markets, and the increase in the cost of food production. The main implication of the high prices is that food security is at risk. Several citizens will not be able to access adequate food if the prices are prohibitive. This will lead to poor health, increase in diseases and low quality of life. Moreover, high food prices adversely affect economic growth by reducing savings and investments among citizens.

In this regard, the government should intervene by implementing policies that promote food production in order to reduce prices. This includes providing incentives to famers to increase production. Research in the agricultural sector should focus on developing alternative farming methods that will reduce the cost of producing food. Apart from increasing food production, government intervention in the commodity market should focus on price stabilization. In this regard, the government should control speculative actions in the food market to prevent fluctuation of prices.

References

Besanko, D., & Braeutigam, R. (2010). Microeconomics. New York, NY: McGraw-Hill.

Boyes, W., & Melvin, M. (2010). Macroeconomics. New York, NY: McGraw-Hill.

French, S. (2007). Pricing effects on food choices. Journal of Nutrition, 133(3), 841-843.

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Headey, D. (2010). Anatomy of a crisis: The causes and consequneces of surging food prices. Agribusiness Economics, 39(1), 375-391.

IMF. (2013). Impact of high food and fuel prices on developing countries: Frequently asked questions. Web.

Khan, T., Powell, L., & Wada, R. (2012). Fast food consumption and food prices:Evidence from panel data on 5th and 8th grade children. Journal of Obesity, 1(2), 8-10.

Pleven, L. (2013). Bad weather pushes up food prices. Web.

USAD. (2013). Changes in food price index: 2011 through 2014. Web.

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