Riots in southeast Asia and Africa are not really outside of the norm these days. However, rioting because food prices are too high, well, that is definitely hasn't been the norm in the past. Just recently people in these regions have been demonstrating the skyrocketing food prices. Wait a minute, it's all just supply and demand right? Not really. Apparently failed economic policies and attention to the environment has led to rice prices being so high that average people in Asia and Africa are struggling to eat.
Farming is a very subsidy dependent industry around the world. Food prices have traditionally been down because the government pays farmers to raise crops and live in borderline poverty. The United States still maintains high tariffs on sugar and other commodities to protect its farmers from cheaper foreign goods and to keep them in business. This, in turn, has led to the poverty of many Caribbean nations that depend on commodity trading and cash crops to survive. In turn, the farmers push the federal government to lower export restrictions so they can sell more grain at those low prices and make more profit. The net result is that we leave our neighbors impoverished while selling them cheap grain and emptying our reserve stock. Well, it worked for the United States.
Then the rest of the world started using this technique because, hey, why not make money of food exports while protecting your farmers. Remember, a state's responsibility lies only to the people within its borders (or so a realist would have you believe). India and other smaller Asian nations do the same thing with rice. They place import restrictions so that their farmers won't drown in a flood of cheaper foreign rice. At the same time, they sell Indian rice at discounted rates across the world. This worked when Asia was still considered the third world. But economic growth also brings a growth in appetite.
More rice is being consumed and there just isn't enough rice being produced to meet the demand because the larger nations basically protected themselves to the extent that they were the only ones producing rice anymore. The smaller countries hurt by tariffs quit the business because there was no money in it. Sure they could sell domestically, but it would be at a higher price than the foreign goods and it wouldn't even meet internal demand. Additionally, there are many nations, such as Japan and the Philippines, that import a great majority of their food due to their geographical positioning. What happened was basically an extreme version of Ricardo's comparative advantage. Extreme because it was manufactured by tariffs instead of an actual advantage in production.
If this weren't enough, the price of bread, eggs, and meat have also increased dramatically over the past year. The rising middle class of India and China, nations which make up 1/3 of the world's population, has developed a taste for wheat based bread and meat. This due, in part, to bread manufacturers increased advertising in those regions in the past few years and, in part, to the increased income levels. The Asian sector's taste for more meat has also contributed to the rise in food prices because more beef means more feed for the cows. And if you didn't know, cows eat a copious amount of grain. Finally, the rising costs of transportation due to the increase in gas prices has also lead food distributors to increase prices to generate a margin. The net result is that bread in the United States has gone from about $1.25 per loaf to about $3.50.
However, there is another culprit that is garnering attention in Europe and the United States. It's also garnering a good amount of disdain from the rioters in Asia as well. Biofuels. The EU and United States have provided numerous incentives for farmers to plant field of corn that are reserved for biofuel conversion. When this alternative energy source was touted a few years ago we were promised clean burning fuel that originates from a renewable resource. We were on our way to El Dorado. However, what government officials and proponents of biofuels failed to mention was that every liter of the stuff that is created takes nearly 90% of the output it would generate as a fuel. If that didn't make sense, then here's an example. Lets say I convert some corn into 1 liter of biofuel. I'd have to use 900ml of that biofuel to generate another liter of the stuff. Basically, we're netting 10% from corn. The other 90% is a wash because equivalent energy was used to produce it.
That isn't to say that biofuels are worthless. It is only to say that biofuels are worthless right now. Until a more efficient way to produce the stuff is developed, we are basically just growing corn and burning it. And we are growing corn on land that was previously used to grow wheat. The EU has put their 2010 goal of biofuel integration on indefinite hold because of the food crisis that has taken over the globe. They are also considering easing their emissions reduction commitment they made a few years ago after Kyoto. Its time that the United States do the same thing. There's no reason to provide farmers incentive to grow corn that is essentially going in the trash. We should mandate that the land used for biofuel subsidies be turned to wheat production in order to ease international and domestic prices. Demand is only going to increase and cutting supply puts us on the fast track food riots at Wegman's.
What we also need to do is get the Bretton Woods institutions involved. The World Bank needs to develop programs that give aid to struggling nations that will put their land to use. In essence, provide subsidies to farmers in poorer countries to produce rice in order to meet the demand. We should also encourage bigger nations to reduce their import restrictions on certain foodstuffs by providing monetary assistance to their farmers. The Bank should then take a certain percentage of the profits of commodity sales as repayment of the loans given to farmers and nations. We need to stop brutal regimes, like the one in Myanmar, from exporting all its rice for profit while its people starve in the streets.
It was only a matter of time before the rest of the world caught up to the West in terms of eating habits. Food prices are going to rise consistently and are probably going to stay at higher levels for the long haul. The only reason for this current shock is because of poor economic policies by countries that depend on agriculture and the belief in biofuel hype. Sure, hindsight is 20/20 but its not too late to turn it around, yet.
Farming is a very subsidy dependent industry around the world. Food prices have traditionally been down because the government pays farmers to raise crops and live in borderline poverty. The United States still maintains high tariffs on sugar and other commodities to protect its farmers from cheaper foreign goods and to keep them in business. This, in turn, has led to the poverty of many Caribbean nations that depend on commodity trading and cash crops to survive. In turn, the farmers push the federal government to lower export restrictions so they can sell more grain at those low prices and make more profit. The net result is that we leave our neighbors impoverished while selling them cheap grain and emptying our reserve stock. Well, it worked for the United States.
Then the rest of the world started using this technique because, hey, why not make money of food exports while protecting your farmers. Remember, a state's responsibility lies only to the people within its borders (or so a realist would have you believe). India and other smaller Asian nations do the same thing with rice. They place import restrictions so that their farmers won't drown in a flood of cheaper foreign rice. At the same time, they sell Indian rice at discounted rates across the world. This worked when Asia was still considered the third world. But economic growth also brings a growth in appetite.
More rice is being consumed and there just isn't enough rice being produced to meet the demand because the larger nations basically protected themselves to the extent that they were the only ones producing rice anymore. The smaller countries hurt by tariffs quit the business because there was no money in it. Sure they could sell domestically, but it would be at a higher price than the foreign goods and it wouldn't even meet internal demand. Additionally, there are many nations, such as Japan and the Philippines, that import a great majority of their food due to their geographical positioning. What happened was basically an extreme version of Ricardo's comparative advantage. Extreme because it was manufactured by tariffs instead of an actual advantage in production.
If this weren't enough, the price of bread, eggs, and meat have also increased dramatically over the past year. The rising middle class of India and China, nations which make up 1/3 of the world's population, has developed a taste for wheat based bread and meat. This due, in part, to bread manufacturers increased advertising in those regions in the past few years and, in part, to the increased income levels. The Asian sector's taste for more meat has also contributed to the rise in food prices because more beef means more feed for the cows. And if you didn't know, cows eat a copious amount of grain. Finally, the rising costs of transportation due to the increase in gas prices has also lead food distributors to increase prices to generate a margin. The net result is that bread in the United States has gone from about $1.25 per loaf to about $3.50.
However, there is another culprit that is garnering attention in Europe and the United States. It's also garnering a good amount of disdain from the rioters in Asia as well. Biofuels. The EU and United States have provided numerous incentives for farmers to plant field of corn that are reserved for biofuel conversion. When this alternative energy source was touted a few years ago we were promised clean burning fuel that originates from a renewable resource. We were on our way to El Dorado. However, what government officials and proponents of biofuels failed to mention was that every liter of the stuff that is created takes nearly 90% of the output it would generate as a fuel. If that didn't make sense, then here's an example. Lets say I convert some corn into 1 liter of biofuel. I'd have to use 900ml of that biofuel to generate another liter of the stuff. Basically, we're netting 10% from corn. The other 90% is a wash because equivalent energy was used to produce it.
That isn't to say that biofuels are worthless. It is only to say that biofuels are worthless right now. Until a more efficient way to produce the stuff is developed, we are basically just growing corn and burning it. And we are growing corn on land that was previously used to grow wheat. The EU has put their 2010 goal of biofuel integration on indefinite hold because of the food crisis that has taken over the globe. They are also considering easing their emissions reduction commitment they made a few years ago after Kyoto. Its time that the United States do the same thing. There's no reason to provide farmers incentive to grow corn that is essentially going in the trash. We should mandate that the land used for biofuel subsidies be turned to wheat production in order to ease international and domestic prices. Demand is only going to increase and cutting supply puts us on the fast track food riots at Wegman's.
What we also need to do is get the Bretton Woods institutions involved. The World Bank needs to develop programs that give aid to struggling nations that will put their land to use. In essence, provide subsidies to farmers in poorer countries to produce rice in order to meet the demand. We should also encourage bigger nations to reduce their import restrictions on certain foodstuffs by providing monetary assistance to their farmers. The Bank should then take a certain percentage of the profits of commodity sales as repayment of the loans given to farmers and nations. We need to stop brutal regimes, like the one in Myanmar, from exporting all its rice for profit while its people starve in the streets.
It was only a matter of time before the rest of the world caught up to the West in terms of eating habits. Food prices are going to rise consistently and are probably going to stay at higher levels for the long haul. The only reason for this current shock is because of poor economic policies by countries that depend on agriculture and the belief in biofuel hype. Sure, hindsight is 20/20 but its not too late to turn it around, yet.
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