Demand↑ and Supply↓ = Food Prices↑

Paul Krugman has simplified the recent increase in global food prices. On his blog he had the following graph which shows the % declines in grain production.

Demand Pressures

With the exceptional growth in China and a change in diet, there is more pressure on imports of food. The US Grains Council, which in October pegged China’s 2011 corn imports at 2m-3m tonnes, said that the figure could reach 3m-9m. However, as Krugman, points out the demand for grain is highly inelastic. For the United States, they put the price elasticity of demand for breads and cereals at 0.04 — that is, it would take a 25 percent rise in price to induce a 1 percent fall in consumption.

Supply Pressures
Most of the decline in world wheat production, and about half of the total decline in grain production, has taken place in the former Soviet Union — mainly Russia, Ukraine, and Kazakhstan. As you may know this was due to unique heatwave that was prevalent in the area. I blogged on this on 5th September last year – Wheat Prices – what’s driving them up? And it’s not just the FSU (Former Soviet Union): extreme weather elsewhere has played a role in bad harvest around the world.

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