Reasons for Rising Food Prices? Supply, Demand, Climate

Thursday, 17 February 2011 08:19 By Paul Krugman, Krugman & Co. | Op-Ed | name.

Reasons for Rising Food Prices? Supply, Demand, Climate
In China, the production of iron ore affects the fast-growing economy. (Photo: Tyler Hicks / The New York Times)

Political unrest in the Arab world and elsewhere is supposedly being caused by the actions of none other than … Federal Reserve chairman Ben S. Bernanke!

That is ridiculous, but still, I’ve been getting correspondence from readers insisting that Mr. Bernanke is responsible. You see, quantitative easing leads to rising food prices, which leads to riots, which … O.K., there are a lot of broken links in that silly chain. Let’s take a look at food and commodity prices to discover what’s really going on.

I recently used data from the International Monetary Fund to rank commodities by their percentage-price increases in 2010. Up at the top of the list were cotton (which increased nearly 120 percent) and iron ore (which increased more than 80 percent). What caused this trend?

First and foremost, China. Demand in China, demand for Chinese goods and an artificially low yuan are driving the global markets.

But as I and other commentators have pointed out before, the world economy is now bifurcated: advanced economies are still depressed, but emerging economies are seeing an inflationary boom. Rising commodity prices reflect this boom.

Also, the evidence suggests that there’s a lot of physical hoarding going on. For example, news reports indicate that Chinese farmers are hoarding a lot of cotton, while record stockpiles of iron ore are collecting in port warehouses.

During the last commodity price spike, which was less than three years ago, many people thought speculators were to blame. Yet this time there is no indication that the futures market or speculators are playing a part in what’s happening in China.

A man holds a cotton bud in a field on the outskirts of Boxing, China on Thursday, September 6, 2007. (Photo: Danfung Dennis / The New York Times)

A man holds a cotton bud in a field on the outskirts of Boxing, China, on Thursday, September 6, 2007. (Photo: Danfung Dennis / The New York Times)

The decisions to hoard cotton are being made by individual Chinese farmers and in factories — an old-fashioned form of speculative hoarding, rather than involving Wall Street. For at least some commodities, then, what we’re seeing is a true demand boom and its consequences.

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So what about rising food prices? There is not much evidence of hoarding, as far as I can tell. Again, this seems to be a straightforward issue of supply and demand. Demand may be up to some extent because of that emerging-market boom.

But if you look at reports from the Food and Agriculture Organization of the United Nations, it becomes clear that the key reason for the increase in cereal prices, for example, is that production is down in advanced countries, largely owing to terrible weather. (So it’s likely that climate change has also played a role.)

Last modified on Thursday, 17 February 2011 12:34