What’s Driving Food Prices?

Women farmers on a sugar plantation in Mozambique.

Women farmers on a sugar plantation in Mozambique.

Global food prices continue to increase. According to the UN Food and Agriculture Organizasiton, global food prices reached the highest level on record in January, surpassing the mark previously set during the 2007-08 global food crisis. Last week, the European Union took the dramatic step of loosening longstanding import restrictions intended to protect European farmers from international competition. The move, which clearly hints that European markets are tighter than most observers believed, came on the heels of announcements by the US government that its corn harvest will likely be smaller than originally forecast. Meanwhile, international protests over higher food prices continue to rock governments around the world, most recently in Yemen.

What’s driving food prices higher? Obviously, production shortfalls and increasing demand in emerging economies are a part of the explanation. The diversion of food into ethanol fuel production, most notably for US corn production, is also an element.

But last week, Fed Chairman Ben Bernanke was forced on to the defensive. According to some critics, the decision of the US Federal Reserve to engage in a policy of quantitative easing, intended to increase the supply of money in the US economy in order to fuel economic growth, has driven investors into commodity markets, including food commodity markets, driving prices up. 

Although Bernanke strenuously denied the charges, the world’s top sugar traders last week echoed a similar concern. In a letter to the ICE Futures US exchange, the World Sugar Committee condemned “parasitic” computer traders who engage in high-frequency speculative trades which “only serve to enrich themselves at the expense of traditional market users.”  Sugar prices last week hit their highest levels in more than 30 years.

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