In the United States, it’s sometimes hard to imagine the disaster that rising food prices wreak. In Western countries, we are more likely battling obesity than starvation. In 2007, with food prices skyrocketing, The Economist declared this:
“In 1974-2005 food prices on world markets fell by three-quarters in real terms. Food today is so cheap that the West is battling gluttony even as it scrapes piles of half-eaten leftovers into the bin. That is why this year's price rise has been so extraordinary. Since the spring, wheat prices have doubled and almost every crop under the sun—maize, milk, oilseeds, you name it—is at or near a peak in nominal terms. The Economist's food-price index is higher today than at any time since it was created in 1845.”
The price frenzy drove herds of speculative investors, enabled by new financial products developed by megabanks like Goldman Sachs and Barclays, to push prices higher and higher. The speculative frenzy had major collateral damage as riots exploded in 30 countries from Asia to South America, and more than a billion people (over 15% of the global population) were driven into “food insecure” status by the World Bank. In 2008, a horrifying 250 million people were driven into hunger in a single year, the biggest increase in human history.
And then, like all speculative bubbles, the food bubble popped. By the end of 2008, prices on most food items had subsided to their pre-bubble levels. But the collateral damage had been done. While many went on to blame the megabanks, greedy speculators, and the other usual suspects—governments had been screwing up food policy for decades. The Economist went on:
With agflation, policy has reached a new level of self-parody. Take America's supposedly verdant ethanol subsidies. It is not just that they are supporting a relatively dirty version of ethanol (far better to import Brazil's sugar-based liquor); they are also offsetting older grain subsidies that lowered prices by encouraging overproduction. Intervention multiplies like lies. Now countries such as Russia and Venezuela have imposed price controls—an aid to consumers—to offset America's aid to ethanol producers. Meanwhile, high grain prices are persuading people to clear forests to plant more maize.
But just as the food bubble began suddenly in 2006, the United Nations is again warning of rising food prices—a product of bad government policy and the massive currency creation by central banks around the world. Even as consumers are mired in deflation, central bank policy is stirring up inflation in all the wrong places.
According to the food price index of the Food and Agricultural Organization, an arm of the United Nations, food prices are peaking over their highs set in June 2008. With La Niña, a dry weather phenomenon, expected to last unseasonably long, prices aren’t expected to subside any time soon.
There is a cost to not allowing free markets to feed the world. Governments can have their ethanol subsidies, grain subsidies, and “food security,” but there is a cost to pay. That cost is that food prices are at their highest point in human history—with all the related human misery that entails.