I just want to put up the summary about the reasons behind rising food prices that I’ve got after reading and listening many educated opinions. I also want to deny the popular misconceptions that some people have. Of course this is just my opinion.

The main reasons I know are:

  1. Most important is the increased wealth around the globe. Wealthy people eat more meat and less grain, but it takes a lot of grain calories to raise cattle. Some people used to say that wealthy people consume pretty much the same amount of food as poor people. This is wrong. The amount of grain needed to produce one meat stake is enough to feed more than 50 people. Feeding grain to cattle produce major shortages
  2. Ethanol policies in US. We just burn food and we also burn a lot of fossil fuel to produce this food, this is very counter-productive and must be stopped
  3. Climate change. There is permanent (10 years) drought in Australia, for example. Ask Al Gore for details
  4. Free trade failure – many countries are restricting food exports in order to control domestic prices

The reasons that are often mentioned but are completely wrong:

  1. The falling dollar. This is wrong because food prices are rising all around the globe, without any relation to dollar or to any other currency
  2. This is a result of Bernanke lowering interest rates. Wrong, as mentioned above this is unrelated to dollar, hence unrelated to whatever Fed policies are
  3. The food prices are rising because of inflation. Wrong. This one is the most hard to get even for the best minds around, like Barry Ritholtz. Inflation is when the money supply and money velocity are growing faster than supply of goods and services, i.e. inflation is a monetary phenomena. There are countries that are experiencing strong inflation, there are countries where inflation is much lower, but the food prices are on the rise everywhere no matter what the inflation rate is. If you carefully examine the 4 reasons I listed in the first section they clearly show fundamentally increased demand and fundamentally decreased supply. I don’t see the inflation to be the part of this equation