08S7B trailblazers

food prices

Article
The silent tsunami: food prices are causing misery and strife around the world. Radical solutions are needed from The Economist print edition

PICTURES of hunger usually show passive eyes and swollen bellies. The harvest fails because of war or strife; the onset of crisis is sudden and localised. Its burden falls on those already at the margin.
Today's pictures are different. “This is a silent tsunami,” says Josette Sheeran of the World Food Programme, a United Nations agency. A wave of food-price inflation is moving through the world, leaving riots and shaken governments in its wake. For the first time in 30 years, food protests are erupting in many places at once. Bangladesh is in turmoil; even China is worried. Elsewhere, the food crisis of 2008 will test the assertion of Amartya Sen, an Indian economist, that famines do not happen in democracies.
Famine traditionally means mass starvation. The measures of today's crisis are misery and malnutrition. The middle classes in poor countries are giving up health care and cutting out meat so they can eat three meals a day. The middling poor, those on $2 a day, are pulling children from school and cutting back on vegetables so they can still afford rice. Those on $1 a day are cutting back on meat, vegetables and one or two meals, so they can afford one bowl. The desperate—those on 50 cents a day—face disaster.
Roughly a billion people live on $1 a day. If, on a conservative estimate, the cost of their food rises 20% (and in some places, it has risen a lot more), 100m people could be forced back to this level, the common measure of absolute poverty. In some countries, that would undo all the gains in poverty reduction they have made during the past decade of growth. Because food markets are in turmoil, civil strife is growing; and because trade and openness itself could be undermined, the food crisis of 2008 may become a challenge to globalisation.

Analysis
The world food price has gone up significantly. We can explain the phenomenon using the demand and supply theory.
The demand of food has increased due to a gentle upward pressure from China and India as their people consumer more grains and meat as they grow rich. There is also a significant fall in supply of normal food. This is attributed to a sudden surge in demand for biofuel raw materials (e.g. corn). As resource is scarce—there is limited land, human resource available—farmers have to make a choice between producing normal food or biofuel sources. Because of the higher profit margin promised by biofuel source, many farmers have switched to producing corns instead of normal food like rice. Consequently, the increase in demand and decrease in supply have pushed the world food price to a much higher level.
By right, the increasing price for food would mean farmers earning supernormal profits, therefore current farmers would expand operating capacity, more entrants will be attracted into the industry and output shall increase. The market would be very responsive to the change in price and quickly restore the system to equilibrium. However in reality that is not the case. There are many reasons for this. First of all, generally farming industry is sticker to price change as compared to industries like toy or clothing. This is because it always takes a season to grow crops. Even though the price is high currently, by the time the new planted crops are harvested, the price may no longer be high. Therefore, a 10% increase in price may not lead to a proportionate increase in output. Secondly, it is difficult for farmers to expand operating capacity in the short run. Farming industry is segmented to large farms and smallholders. We shall evaluate the large farms first. For the large farms, they are not likely to increase their productivity in the short run as it takes quite some time to upgrade their irrigation system, and there is limited fallow land easily available. Also, they have encountered the situation of diminishing marginal returns. The increase investment in fertilizers, pesticides or machinery will not be economically worthy. If the large farms are unlikely to expand, for the smallholders, they are unable to. The smallholders are mainly concentrated in the less developed countries. They are unable to afford the fertilizers, pesticides or fancy seeds, let alone constructing an advanced irrigation system or buying modern machineries. Hence, it is not likely that the smallholders will increase output significantly.In conclusion, the soaring food price will be a problem for some time. We need collective commitment from the globe to solve the issue.

wuhong:D

posted by HOng @ 2:10 PM