Why Are Food Prices Rising? Causes of Food Price Inflation

Effects Around the World

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

Over the past two decades, food prices have risen 2.6 percent a year on average. But recent factors have slowed food price inflation. The change is only temporary, though. Once those downward pressures abate, food prices will resume their normal upward trend.

Food Prices Rise for Four Reasons

There are four causes of inflation in world food prices. They will drive up food prices in the long run. There are also short-term factors that affect supply and demand.

Those include the weather, animal diseases and catastrophes. The following four reasons drive prices higher over time. 

1. High oil prices raise shipping costs. Food is transported great distances. You can expect high gas prices about six weeks after an increase in oil futures.

Oil prices also affect farming. Oil byproducts are a large component of fertilizer. That contributes 20 percent of the cost of raising grain. Between 2001 and 2007, high oil prices added 40 percent to the cost of raising corn, wheat and soybeans. 

2. The U.S. government subsidizes corn production for bio-fuels. That takes corn out of the food supply, raising prices. America now uses 40 percent of its corn crop to make ethanol. That's up from 6 percent in 2000. (Source: "Oily Food," The EconomistOctober 10, 2015.)

3.  Third, the World Trade Organization limits the amount of subsidized corn and wheat that can be added to global stockpiles.

 The United States, the European Union and some developing countries heavily subsidize their agricultural industries. This gives farmers in those countries an unfair trade advantage. The WTO’s limits stockpiling to lower this advantage. But it also reduces the amount of food available in a shortage.

That increases food price volatility. (Source: “Food Security,” World Trade Organization.)

4. People around the world are eating more meat. That's because they are growing more affluent. It takes more grain to feed the animals needed for meat-based meals than is needed for grain-based meals. A higher demand for meat means higher grain prices. 

Forecast

Food prices will rise one percent or less in 2017. That's much lower than recent trends. That's because the dollar has remained stronger than normal, depressing food exports. That increases the domestic supply and lowers prices. Oil prices are also expected to remain moderate. California's drought has been interrupted by heavy rains, allowing greater production. (Source: "Food Price Outlook," USDA.)

Recent Trends

2016: Food prices were expected to rise 1-2 percent. That's lower than the historical rate of food price inflation. It could increase if the California drought affects supply of fruit, vegetables, dairy and eggs. It could fall if oil prices remain low. (Source: "Food Price Outlook," USDA.)

2015: Prices increased 1.9-2.5 percent on average. Beef, veal and pork prices rose 3 percent due to a drought in Texas and Oklahoma. Egg prices skyrocketed 17.8 percent thanks to the Highly Pathogenic Avian Influenza.

Fish and seafood cost 0.9 percent less than in 2014. 

2014: Food prices rose 2.4 percent in 2014. That's much lower than the 6-7 percent forecast. Prices of specific types of food rose thanks to weather conditions. For example, drought in the Midwest drove up beef prices 12.1 percent in 2014. The prediction had been 28 percent. That's because the beef industry had been suffering from drought since 2012. Here's how beef prices affected the demand schedule.

The California drought, one of the worst on record, resulted in higher prices for fresh fruits, vegetables and nuts. Fruit prices were forecast to rise 4.5-5.5 percent. They actually rose 3.8 percent. (Source: "Changes in Food Price Indexes, 2013-2016," Table from USDA.) 

2013: Food prices rose only 1.4 percent in 2013, according to the U.S. Department of Agriculture.

Beef and veal prices rose 2.0 percent in 2013. Thanks to high grain prices from the 2012 drought, they slaughtered cattle that were too expensive to feed.

The 2012 Midwest drought also 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 occurred in 2013. Hardest hit were fresh vegetables, which rose 4.7 percent. (Source: "Changes in Food Price Indexes, 2013-2016," Table from USDA.) 

2012: The drought didn't affect food prices overall in 2012, which only increased 0.5 percent. There were exceptions, including beef, veal, poultry and fruit. But prices fell for pork, eggs and vegetables. The USDA expected prices to rise 2.5-3.5 percent. 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 was also concerned about reduced soybean production in South America and ongoing consequences from shortages that occurred the year before.

2011: In 2011, prices rose 4.8 percent. Some experts said this contributed to the riots known as the Arab Spring. According to the World Bank, wheat prices more than doubled in 2011. 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 United States 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 after Japan's earthquake. (Source: "Food Price Outlook 2012," USDA.)

2008: Food prices rose a whopping 6.8 percent. Commodity speculators 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 caused by 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. Food prices skyrocketed worldwide. As a result, food riots by people facing starvation erupted in less-developed countries.

Effect of Food Price Inflation

Food riots occurred in 2008 and in 2011, following price spikes. Many say the radical changes brought about by the Arab Spring were caused by food riots.

As prices continue to rise, food riots could become a bigger problem. World leaders, such as the G-20 or G-7, should address the four underlying reasons. Otherwise, food price inflation will continue to create more global unrest. (Source: "Food Prices Could Hit Tipping Point for Global Unrest," Wired, August 15, 2011.)