Global Competition Fueling Food Inflation

While there has been a great deal of press on the rising expense of oil and energy products, relatively little has been in the news about the sharp increase in food prices. Less yet has been written about the underlying causes of these price hikes. Of course, immediate problems, such as tensions in oil producing nations or droughts and natural disasters in the food producing regions, do affect the prices of commodities over the short term. However, the fundamental forces at play are much more complex. Much of the recent increase in energy and food prices is due to a substantial shift of economic power in the global marketplace, rather than simply a temporary effect of minor market disruptions.

For a great many years, the United States and other westernized societies, such as Western Europe, Japan, and Australia, have been the world's leading consumer of food and energy products, virtually driving the global economy. On average, citizens of these developed nations consume 32 times as many resources per capita as those in developing nations. The United States alone, with just five percent of the world's population, consumes approximately one third of the world's resources.

However, this pattern is beginning to change, as the developing world gains ground in consumption every day, fueled by economic growth and industrialization. As the standard of living rises in the developing nations, so too does the demand for resources. China, with its population of 1.3 billion people, is leading the pack of nations that are moving towards the American lifestyle of materialism and heavy resource consumption, and India is not far behind, with its 1.1 billion citizens. A growing middle class in countries like China, India, and many of those with oil rich economies like Saudi Arabia and Russia, is driving a surge of commodities demand and cost increases that is entering its sixth year as 2008 begins, with many economists stating that there is no end in sight.

Another factor that has contributed to food inflation is the increase in the production of biofuels, particularly ethanol, to meet rising energy demands. Largely due to the surge in oil prices, there has been an increasing effort towards energy independence by the United States in recent years. Government subsidies have made the US ethanol industry much more profitable, spawning a surge of growth and expansion. At the end of 2006, 110 ethanol refineries were in operation in the United States, and 73 more were being built, while many of the existing refineries were being expanded in order to increase capacity. These construction and expansion projects are due to be completed by the end of 2008, giving the industry a projected capacity of 11.4 billion gallons of ethanol production per year in US refineries alone, as opposed to a worldwide production level of just 9.66 billion gallons in 2005.

Refineries in the United States produce ethanol from corn. The rapid increase in ethanol production has had a significant impact on corn prices, which have surged to the highest level that has been seen in more than a decade. Since corn is a primary staple in animal feed, accounting for more than 90 percent of total feed grain production, these price hikes have raised the cost of doing business for farmers.

The combination of higher feed prices and steep increases in energy costs borne by food producers have brought higher prices to the grocery store shelves. According to government statistics, beef and veal prices saw an increase of 4.5 percent in 2007, poultry prices soared by 5.2 percent, dairy product prices saw a 7.4 percent surge, and egg prices rose by an astonishing 28 percent from the previous year. However, the true impact on the budgets of everyday consumers is quite likely to be significantly higher than those government statistics, as the methods used to gather the official inflation numbers are often an inaccurate assessment of real inflation at the consumer level.

Many Americans await the end of the turmoil caused by the housing bubble burst and sub-prime mortgage meltdown, as well as the by the wars and unrest in oil producing nations. They are confident that the passing of these disruptive events will bring the prices of energy and food back down to earth. However, chances are they will be disappointed. Any relief brought by the resolution of these short term disruptions will have little effect on the fundamental problem of increasing demand against a finite pool of global resources. As citizens in developing nations begin to adopt western standards of consumption in ever increasing numbers, the global inflation rate cannot be expected to do anything other than continue to reach new heights.

Sharon Secor writes frequently on a number of financial topics, and is a staff writer at Lenders Mark and Direct Lending Solutions, sites offering a variety of resources to help manage financial affairs during inflationary periods or other times of economic challenge.