Commodities, Inflation

Grain’s Gains

By, 04/30/2008

Story Highlights:

  • Over the last five years, the price of grains has skyrocketed.
  • The price increases are sparking fear in some countries, resulting in limitations on exports, which hurts developing countries dependent on imports.
  • Government policy, increased wealth in Emerging Markets and the irrefutable law of supply and demand are to blame.


Good gravy! Food suddenly seems expensive. During the last five years, the price of corn has surged 140%, wheat 181% and rice 279%. The resulting price increase in end products is enough to cause anyone indigestion. To date, grain's gains haven't materially impacted Americans because food accounts for a relatively small percentage of our personal expenses. However, in Emerging Markets, food is a significant portion of consumer expenditures, and recent supply disruptions are causing unrest in countries like Haiti and Egypt. But does disaster loom, as recent headlines imply?

U.N. and World Bank Say to Tackle Food Crisis
By Laura MacInnis, Reuters

Food Prices Are Global Challenge, Says UN
Staff, RTE News

Aggregate demand for food is rising as more folks move up the income scale and can afford higher-quality and processed foods. As China, India and Brazil develop an urban middle class, consumption habits evolve. Rather than eating simple grains as they have for centuries, newly wealthy (or wealthier) individuals are now buying meats and processed foods. But providing one meal of processed food generally takes more raw grain than it would to provide one meal of the grain itself.

Also, we must note the feel-good demand for bio-fuels (e.g. ethanol) has been driving a "fuel-for-food" substitution. Increased energy costs boost the case for bio-fuel mandates in an attempt to lower carbon emissions and energy costs. Forget the fact there is little evidence bio-fuels are any "greener" than traditional sources of energy; there is still enormous demand for bio-fuel inputs such as corn and oilseeds, greatly reducing the supply of acreage available for other grains like wheat and rice. Speaking of supply...

Food supply is quirky and government policies create massive distortions. We're not facing catastrophic shortages as some believe, but rather shortages resulting from fear and ill-advised policies. Take ethanol subsidies, for example. When farmers are incented to shift from growing wheat used for food to growing corn to satisfy bio-fuel mandates, not only will corn prices rise, but so will the price of other grains now in shorter supply.

So, what's being done? In Asia, some countries erected trade barriers in the form of export limits or taxes on rice and other commodities. Others have instituted rice subsidies. Nations importing rice will likely see prices rise further. There is also some evidence both speculators (commodity traders) and governments have been hoarding rice in anticipation of more trade barriers and/or higher prices. All this creates disruptions—supply reductions and higher prices. These factors can result in higher food prices even in the absence of broader inflationary forces.

Of course, we champion solutions reducing government-caused distortions and allowing market prices to determine the optimal allocation of resources. And while countries hoarding their own rice may feel less afraid, they're only applying a band-aid, if not exacerbating the problem. Freer trade, not limited trade, offers a more viable long-term solution.

Freer Trade Could Fill the World's Rice Bowl
By Tyler Cowen, The New York Times

Government distortion likely does nothing but cause higher prices. Even so, it's likely the market will eventually catch up. More acres will be planted in the highest-priced crops, increasing supply and easing prices down the road.

The laws of supply and demand rule for food prices as they rule for all prices. Put simply, the world is getting wealthier and folks want a better lifestyle—including better food. The key is avoiding policies stifling free trade. Hoarding boxes of Rice Krispies doesn't ensure we won't run out—it just raises panic, speculation, and prices—and keeps them from countries that don't have a domestic source for cold cereal. Set Snap, Crackle, and Pop free!

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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