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

Food Prices Rise for 4 Reasons

Grocery prices have risen 2-3% each year since 1990. There are four causes of this inflation in world food prices.

First, high gas prices prices lead to higher food prices. Food is transported great distances, especially if imported. That raises shipping costs, which translates into higher food prices. High gas prices are caused by high oil prices cause high gas prices.

 It usually takes about six weeks for increases in oil futures to translate to the pump.

Oil byproducts are also used to make fertilizer. That contributes 20% of the cost of raising grain.  Higher oil prices increase corn, wheat, and soybean cost by 40% between 2001 and 2007. 

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

Third, the World Trade Organization (WTO) limits the amount of corn and wheat that the U.S. and European Union (EU) can subsidize and store in stockpiles. This reduces the cushion available to add to the food supply when there are shortages, thus adding to food price volatility.

Fourth, as more people around the world are growing more affluent, they eat more meat.

Grains are going to feed the animals that provide meat, further reducing the supply and increasing price volatility. 

2016 Food Price Forecast

Food prices are expected to rise 2-3%. That's the historical rate of food price inflation. That could increase if the California drought affects supply of fruit, vegetables, dairy and eggs.

It could fall if oil prices remain low. (Source: USDA, Food Price Outlook)

2015 Forecast

Prices are expected to come in 1.5%-2.5% higher than in 2014. Beef, veal and pork prices will rise 3-4%, a result by the drought in Texas and Oklahoma. That increase could last another 16-18 months, since that's how long it takes for these animals to grow. Eggs prices will be 12.5-13.5% higher. The Highly Pathogenic Avian Influenza (HPAI) reduced the supply of egg-laying hens.  while seafood and chicken will cost 2.5% - 3.5% more. 

Why Food Prices Rose in 2014 

Food prices rose 2.4% in 2014. That's much lower than the 6-7% forecast. Prices of specific types of food rose thanks to weather conditions. For example, drought in the Midwest drove up beef prices 12.1% in 2014. There were expected to rise 28%. That's because herds had not recovered from the slaughter in 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%. They actually rose 3.8%. (Source: Changes in Food Price Indexes, 2013-2016, Table from USDA) 

2013

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

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

The Midwest drought in 2012 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%.  (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 .5%.

There were exceptions, including beef, veal, poultry and fruit. However, prices actually fell for pork, eggs, and vegetables. The USDA expected prices to rise between 2.5-3.5%. 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 also was 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%, which some experts said eventually led to the riots known as the Arab Spring. According to the World Bank, wheat prices in 2011 more than doubled, and 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 U.S. 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 due to Japan's earthquake. (Source: USDA, Food Price Outlook 2012)

2008

Food prices rose a whopping 6.8%. 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 based on 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, droving up global food prices dramatically around the world. 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. Many say the radical changes brought about by the Arab Spring were an effect of food riots. Researchers point out that these food riots were caused by a spike in prices. However, as prices continue to rise, food riots could become an ongoing response to unsustainable price increases. Unless a concerted effort is made to correct the underlying reasons for food price inflation, global unrest could become a more prevalent result. (Source: The Food Crises and Political Instability in North Africa and the Middle East, By Marco Lagi, Karla Z. Bertrand and Yaneer Bar-Yam. arXiv, Aug. 11, 2011 in Wired Magazine, Food Prices Could Hit Tipping Point for Global Unrest, August 15 2011) Article updated November 21, 2015.