After watching the news today, I reflected on the four root causes listed for the recent spike in food prices: (1) using food for fuel, (2) the rising price of oil, (3) the low U.S. dollar, and (4) a bad weather season for crops. Note that the order listed doesn’t represent the magnitude of each cause. First, interestingly enough, many people that argue that corn used for ethanol is okay, don’t realize that the surplus of corn grown often results in farmers choosing to plant more corn over soy, wheat, and other staple crops that are vital to the American diet. Rice prices have also started to increase. The Sam’s Club has limited rice purchases to 4 of the 20 lb bags per customer (http://www.breitbart.com/article.php?id=2008-04-23_D907S6QO0&show_article=1&cat=breaking). Also, when farmers realize that they may reap more profits by selling their corn for ethanol production instead of food, they will be encourage to sell more of their crop for ethanol. This will inevitably result in significantly higher food prices not just for corn, but soy, wheat, and other crops. Second, the rising price of oil, whether by a shortage of crude or a shortage of refined oil, affects the price of food since the transportation of crops and fertilizers consume oil. In addition, tractors and other harvesting machinery consume oil, also contributing to higher food prices. Third, the low U.S. dollar has caused Americans to pay more for food as well as other products. The low dollar has also encouraged many wealthy investors to invest overseas to gain a higher interest rate since the Fed. recently reduced U.S. interest rates. The lower interest rates mean that many U.S. savings accounts and money market accounts are not earning as much in a poor economy as they were in a healthy economy, making it more difficult to compensate for a higher priced economy. Fourth, bad weather has caused an increase in food prices not just in the U.S., but world wide. Riots have broken out in many countries due to food shortages or exuberantly high food prices. Not to say that this scenario may play out in the U.S., but it can’t hurt to stock up the pantry. See “Load up the Pantry” by Brett Arends (http://finance.yahoo.com/banking-budgeting/article/104914/Load-Up-the-Pantry).
I’m certain that there are other reasons for high food prices in addition to the four listed, and I look forward to reading your comments. In the mean time, I’m going to be stocking up (which will probably, ironically, increase food prices by increasing demand; it’s a full circle, isn’t it?).