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The US Drought and Global Food Prices

July 23, 2012

The high temperatures and dry weather that plagued much of the American Midwest this summer will likely have lasting impacts, especially outside the United States. According to a report by the National Oceanic and Atmospheric Administration (NOAA), this year’s drought is the worst to hit the Midwest since 1956. In April, corn prices were below $5 per bushel, as near-record spring plantings led to projections of a sharp increase in global supplies. But speculative investment has already driven prices over $7 per bushel, and many are arguing that could be the tip of the proverbial iceberg.

As the world’s leading corn producer, what happens in the U.S. will affect the rest of the world. And because U.S. corn is used in the production of everything from winter gasoline blends (ethanol), to Coca-Cola (high-fructose corn syrup), to the production of meat (as cattle, hog, and chicken feed), higher grain prices will be reflected in higher consumer prices across a wide range of products.

Yet, in the United States, there will be no famine. The worst drought in a generation will affect farmers and consumers, particularly poorer consumers, to be sure. But widespread famine will not emerge. Why? Amartya Sen’s entitlement theory helps explain it. Sen observes that famine occurs not when there is a lack of food (as a result of drought, for example), but when individuals cannot access the food that exists. At current levels, worldwide food production could provide every man, woman, and child on the planet with more than 2,700 calories per day, if food were distributed equally. This figure, developed by the Food and Agriculture Organization, assumes no changes in our production or consumption patterns. The problem of world hunger, in other words, is not one of production. We have enough food. It’s a matter of access and distribution. Which is the same reason that the U.S. drought will result in a bit of pinch in the wallet but not widespread breakdowns in access to food.

But it does raise questions about our priorities. Approximately 20 percent of US corn production is destined for our gas tanks, an increase of more than 400 percent over the past decade. As long as we continue to prioritize fuel production over food production, we should continue to expect higher prices for both.

Equally importantly, speculators have already sprung into action to take advantage of higher corn prices. Futures contracts for September and December delivery are already trading at more than $7 per bushel, and many analysts are looking for higher prices moving into 2013.

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