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Why Are Food Prices Rising?

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Man shopping groceries in supermarket, side view

Food prices can rise quickly, causing a shock for those on fixed incomes.

Photo: Anderson Ross/Iconica/Getty Images
groceries.jpg

The core inflation rate doesn't include food because the prices change so often.

Photo: Getty Images

Question: Why Are Food Prices Rising?

Answer: Food prices rise in response to high gas prices. That's because transportation is a large cost of food you buy at the store. When you notice prices at the pump rising, expect to see the same thing happen in about six weeks at the grocery store. High gas prices are, themselves, usually caused by high oil prices. Here again, it usually takes about six weeks for increases in oil futures to translate to the pump.

Food Price Forecast for 2013

Food prices are expected to rise three to four percent this year, according to the U.S. Department of Agriculture. That's because of the terrible Midwest drought in 2012 that withered crops in the field. As a result, prices for corn, soybeans and other grains rose. Since it usually takes several months for these commodities prices to translate to the food you buy, most of the drought's effect will occur in 2013.

Higher feed prices will directly affect the cost of meat and any other animal-based product. Also hardest hit will be cereals, baked goods and other grain-based food. (Source: USDA, Food Price Outlook 2013)

2012 Food Prices

The drought didn't affect food prices overall in 2012, which only increased .5%. There were exceptions, including beef, veal, poultry and fruit. However, prices actually fell for pork, eggs, and vegetables. The USDA expected prices to rise between 2.5-3.5%. It based this on $100/barrel oil prices resulting from potential military action against Iran and seasonal high demand caused by vacation driving. The USDA also was concerned about reduced soybean production in South America and ongoing consequences from shortages that occurred the year before.

Reasons for Food Price Inflation in 2011

In 2011, prices rose 4.8%, which some experts said eventually led to the riots known as the Arab Spring. According to the World Bank, wheat prices in 2011 more than doubled, and corn, sugar and cooking oil prices also soared. High wheat prices were caused by massive wildfires in Russia in 2010. In response, commodity speculators drove prices even higher to take advantage of this trend. Drought conditions throughout the southern U.S. reduced both the number and output of egg-laying hens, raising the price of poultry and eggs. Seafood prices were down, in part, because of decreased fishing capability due to Japan's earthquake. (Source: USDA, Food Price Outlook 2012)

Why Did Food Prices Rise in 2008?

Food price inflation caused food riots in 2008, when prices rose a whopping 6.8%. Commodity speculators also caused higher food prices in 2008 and 2009. As the global financial crisis pummeled stock market prices, investors fled to the commodities markets. As a result, oil prices rose to a record of $145 a barrel in July, driving gas prices to $4.00 a gallon. Part of this was based on surging demand from China and India, which escaped the brunt of the subprime mortgage crisis. For more, see Gas Prices in 2008.

This asset bubble spread to wheat, gold and other related futures markets, droving up global food prices dramatically around the world. As a result, food riots by people facing starvation erupted in less-developed countries.

Four Reasons for Long-term Food Price Inflation

Grocery prices have risen 2-3% each year between 1990-2011. There are four global policy shifts that are causing this inflation in world food prices.

First, the U.S. government subsidizes corn production that is used for bio-fuels. This takes corn out of the food supply, raising prices.

Second, the World Trade Organization (WTO) limits the amount of corn and wheat that the U.S. and European Union (EU) can subsidize and store in stockpiles. This reduces the cushion available to add to the food supply when there are shortages, thus adding to food price volatility.

Third, as more people around the world are growing more affluent, they eat more meat. Grains are going to feed the animals that provide meat, further reducing the supply and increasing price volatility.

Fourth, higher oil prices lead to higher food prices. Food is transported great distances, especially if imported. Higher oil and gas prices increase shipping costs, which translates into higher food prices.

Effect of Food Price Inflation

Food riots occurred in 2008 and in 2011. Many say the radical changes brought about by the Arab Spring were an effect of food riots. Researchers point out that these food riots were caused by a spike in prices. However, as prices continue to rise, food riots could become an ongoing response to unsustainable price increases. Unless a concerted effort is made to correct the underlying reasons for food price inflation, global unrest could become a more prevalent result. (Source: The Food Crises and Political Instability in North Africa and the Middle East, By Marco Lagi, Karla Z. Bertrand and Yaneer Bar-Yam. arXiv, Aug. 11, 2011 in Wired Magazine, Food Prices Could Hit Tipping Point for Global Unrest, August 15 2011) Article updated February 5, 2013

 

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