International demand a contributor to price spikes

by Keith Nunes
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Adding pressure to the dramatic rise in commodity and food costs around the world has been progress. Economic growth in several developing economies, most notably China and India, has increased the demand for higher value foodstuffs as well as energy.

Over the past decade, strong global growth in average income combined with rising population has led to an increase in the demand for food, according to the Economic Research Service’s "Global agricultural supply and demand: Factors contributing to the recent increase in food commodity prices" report. As per capita incomes have risen, consumers in developing countries not only increased consumption of staples, but they also diversified their diets to include more higher value items like meat, dairy and vegetable oils, which in turn increased the demand for grains and oilseeds.

Global consumption of meat, for example, has been growing much more rapidly than consumption of grains and oilseeds. Between 1985 and 1990, production of meat rose more than 3% per year. The rate was well above the world’s population growth rate of 1.7% per year. Thus, per capita consumption was able to climb by 1.4% per year.

Although the average growth rates in production and per capita consumption of meat have declined somewhat since 1990, they are still well above the growth rates for grains and oilseeds, according to the E.R.S.

Adding to the pressure has been population growth. While it is true the world’s population growth rate has been on a downward trend since before the 1970s. The number of people inhabiting the planet is still rising by about 75 million per year. The increase in population numbers slowly creates additional demand for food products and energy. The impact on demand, according to the E.R.S., is amplified because the most rapid population growth rates tend to be in developing countries.

Exacerbating the impact of international demand on the U.S. market has been the value of the U.S. dollar. Beginning in 2002, the dollar began to depreciate, first against the currencies of developed countries, and later against many developing countries’ currencies. As the dollar lost value relative to the currency of an importing country, it reduced that country’s cost of importing. Since the United States is a major source of many agricultural commodities, foreign countries’ imports of commodities from the United States began to rise. This put upward pressure on U.S. prices for those commodities. In addition, since the world price of major crops typically is denominated in U.S. dollars, the depreciation of the dollar also raises prices.

As commodity costs around the world increased, it led several governments to take action in an effort to moderate the effect of the rising prices. Some countries began to take protective policy measures designed to reduce the impact of rising world food commodity prices on their own consumers (see sidebar). But such measures typically force greater adjustments and higher prices onto global markets.

The authors of the E.R.S. report note that if good crop production conditions exist in the Northern Hemisphere during the next six months, food commodity prices could retreat significantly from their current highs. On a less positive note, they said if a significant shortfall occurs this year due to weather or disease, food prices might continue to rise sharply from the current high level. Although globalization may mitigate some of the effects, new or existing trade restrictions or barriers may exacerbate price impacts.

Action, reaction

Trade policy changes by various countries

As commodity costs continue to rise through 2007 and into 2008, several countries implemented trade policy changes that have contributed to limited supply in a period of high demand.

Eliminated export subsidies:

• China eliminated rebates on value-added taxes on exported grains and grain products.

Export taxes:

• China, with food prices still rising after eliminating the value-added tax rebate, imposed an export tax on products.

• Argentina raised export taxes on wheat, corn, soybeans, soybean meal and soybean oil.

• Russia and Kazakhstan raised export taxes on wheat.

• Malaysia imposed export taxes on palm oil.

Export quantitative restrictions:

• Argentina restricted the volume of wheat available for export.

• Ukraine established quantitative restrictions on wheat exports.

• India and Vietnam put quantitative restrictions on rice exports.

Export bans:

• Ukraine, Serbia, and India banned wheat exports.

• Egypt, Cambodia, Vietnam and Indonesia banned rice exports.

• Kazakhstan banned exports of oilseeds and vegetable oils.

Source: "Global agriculture supply and demand: Factors contributing to the recent increase in food commodity prices," U.S. Department of Agriculture Economic Research Service

This article can also be found in the digital edition of Food Business News, May 13, 2008, starting on Page 44. Click here to search that archive.

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