Why are food prices rising?

October 17th, 2007

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Reading the financial press lately, you would have noticed that there are numerous reports of food price inflation over the past year. For example, the price of pork is rising in China and wheat prices are going up, along with the price of corn and other industrial commodities. Why is this so?

We have identified 3 broad global macro themes that will shed light to the answer to this question:

  1. Rise of bio-fuels (ethanol) production As we said before in Prepare for more food price inflation, producing bio-fuels divert agricultural resources away from food production and consumption, thus contributing to rising prices both directly and indirectly. Corn is the best example of this.
  2. Climate change This is the dominant reason for rising food prices. Many parts of the agricultural world are in prolonged drought, which resulted in reduced agricultural commodity output. Global warming has been blamed for it. It is unclear whether such climate change is permanent or not.
  3. Rise of China As China becomes wealthier, its people begin to consume more meat. More consumption of meat means more consumption of grains for livestock, which compete against the demand for human-consumed food.

Thus, as much as you believe that these 3 macro themes will remain, food price inflation looks set to continue.