The demand for wheat and other major crops surpassing supply is a cause for price increases.
The diversion of a portion of corn-based production from food to biofuel in the U.S. has increased demand for corn. Simultaneous with the demand for biofuel is the growth of emerging economies and their demand for food for their growing populations. When the demand for food surpasses the supply, this raises the price of corn, edible oil, rice and other major food crops in crop-producing countries. In addition, uncontrollable environmental factors -- such as drought and storms -- affect production. When the price of food rises for all these reason, it affects trade worldwide.
Lack of Standardization of Prices Hurts the Seller
Coffee is an example of a product with high price volatility. Coffee-producing countries that do not participate in standard pricing are affected during trade when they are forced to sell their product at devastatingly low prices because competitors are producing high quantities of low quality production. For example, in 2001, coffee prices fell to a 30-year low of 45 cents per pound because of overproduction by Vietnam and Brazil. Without standardization of prices for the purpose of trade, coffee-producing countries could face economic devastation that hurts growers, processors and traders.
High Prices Make Imported Foods Less Affordable
As local food prices increase, food becomes less affordable for consumers. Where high costs of imported food become unaffordable for trade, households switch to domestic products. In West Africa, for example, instead of consuming imported rice, homegrown products such as cassava, yam and maize are consumed as farmers try to increase domestic trade.
High Prices Boost Rural Economy to Increase Production and Trade
Where high prices on food have a negative effect for consumers, for farmers in rural areas the boom in the agricultural sector creates opportunities for employment and raises rural household incomes. Those sectors with stronger infrastructure and access to credit and technology are able to take greater advantage of the high food price stimulation for increased production and trade.
Reducing Trade Barriers Lowers Food Prices and Equalizes Trade
When food prices increase, even a loaf of bread can become hard to afford. Rich farmers have an unfair advantage of underselling competitors when they receive trade-distorting subsidies. The inequality of the subsidies and pricing affects rural farming in poor countries, and this can contribute to food shortages. Reducing trade barriers is one way to allow people to be able to keep food prices low around the world so that food is affordable and poorer farmers are less vulnerable to market conditions.
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