Where do food prices come from?
Food prices move around quite a bit. We hear about small changes on the news and see them in the grocery store. Bigger changes can cause hunger and riots in poorer countries. In 2007 and 2008 spikes in grain prices led to rioting in dozens of countries, and high food prices in 2011 were one of the factors that fueled the Arab Spring. Economists have a few ways to explain these big changes in food prices, what they call price volatility.
One big problem with food markets is that farmers have to pick which crops they are going to grow before they know what the price will be. In normal markets, if the price for something goes up, more people should make, or supply, that thing. With agriculture, everything is on a delay. High prices in one year can lead to low prices the next if farmers plant more and flood the market.
How much farmers can grow—and at what cost—is also very dependent on outside factors. The weather is the most obvious, as storms, droughts and freezes can dramatically affect how much is grown. Energy prices are also particularly important to food prices, as transporting food takes a lot of oil and making fertilizer takes a lot of natural gas.
Demand can also be a problem for food prices. People usually buy roughly the same amount of food, whether prices are high or low. Economists would say the demand for food is inelastic, meaning demand doesn’t change much when prices go up and down. Things with inelastic demand can have a problem with big price changes. When there’s not enough food, well off people are willing to pay anything to get it, but when there’s too much food it’s hard to get rid of it at any price.
Food waste, biofuels and meat production also affect the price of food by limiting the supply or increasing demand. A lot of food—some estimates say up to half— is thrown away or left to rot at some point between the farm and your plate. Huge amounts of grain are also used to create biofuels like ethanol, or are fed to animals, which produce much less meat than they consume. About 40 percent of the corn in the United States is turned into ethanol, and 35 percent is fed to animals.
Finally, some people argue that speculation on food markets makes price volatility worse, but that’s still controversial.
