Patrick Westhoff’s book “The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices” is a fascinating read because it is targeted to non-specialists who desire to understand the recent trend of high food prices in the world.

Westhoff uses the food crisis in 2008 as a focal point to explain what factors and how they each affect food prices. He also emphasizes that food prices can be affected by a myriad of factors simultaneously, and it is often difficult–sometimes impossible– to disentangle these various factors to determine the degree they cause low or high food prices.

Westhoff gives eight rules of thumb on food prices. The first rule of thumb is increasing biofuel production raises food prices. When food crops such as corn are planted for biofuel, this reduces the available food, which in turn causes food prices to increase. Unless corn production can be raised to replace those diverted for biofuel, demand in biofuel would certainly raise food prices because less food is produced. In the US and Europe, government policies demand that a certain proportion of petrol to consist of biofuel. And to boost biofuel production, government subsidies are given to farmers to encourage more planting for biofuel. In the height of the food crisis in 2008, US government subsidies are one of the reasons blamed for the increase in food prices.

The second rule of thumb is food prices tend to follow crude oil prices. This relationship is well known because oil is the lifeblood of the world’s economy. Without oil, the world’s economy would collapse overnight. High energy prices have a direct impact on farm production costs. About one-third of the farm production costs involves the purchase of fertilizers and pesticides, both of which require oil to produce. Other farm production costs involving oil would be the cost of running farm machinery and equipment. Food are often grown far from cities, so high costs of transportation (which require fuel) are incurred to bring food to the urban folks. Half of the world population today of nearly 7 billion live within cities.

The third rule of thumb is government policies can either lower or raise food prices. For instance, a country that imposes import tariffs (or restricts import) and offers export subsidies causes domestic food prices to be higher than those in other countries. Likewise, a national policy that encourages biofuel production by offering subsidies to biofuel farmers will help to raise food prices because less food would be available. Interestingly, Westhoff explains that national policies are often contradictory to one another. To farmers, high food price is desirable because it increases their income and increase their standard of living. But for the consumers, high food prices are detrimental because they affect the type and amount of food they can buy. Consequently, a national policy that helps farmers by increasing food prices may instead increase the hardship of consumers. In contrast, a policy that encourages cheap food would help consumers but bring more hardship to the farmers. In the height of the food crisis in 2008, rice-exporting countries like India, Vietnam, and Thailand either banned or restricted their rice exports. Their policies caused only 7% of the world rice production to be traded in the global market. With so little rice traded in the global market at that time, rice price skyrocketed.

The fourth rule of thumb is good weather causes low food prices because of bumper crop yields, but adverse weather causes high food price because of low crop yields. Most people would find this relationship easy to understand.  Crops are sensitive to weather. Either too little or too much rain, for example, can cause crop yields to plummet. When too little food is produced (for example, due to bad weather), food prices would increase. The reverse would be true if good weather prevails to increase crop yields but in turn cause food prices to be low.

The fifth rule of thumb is food prices increase when incomes rise and fall when incomes fall. There are two reasons for this. In high- and middle-income countries, when their incomes increase, there would be an increased demand for higher-values food items and lesser demand for basic staples such as rice, wheat flour, and corn tortillas. However, in lower-income countries, increasing incomes would further increase the demand for basic staples. The increased demand for food from these wealthier countries (whether they are a from lower-, middle-, or higher-income category) would act to push up the price of food. The second reason is the well known relationship that the wealthier you are, you would eat more meat. And to produce these meat products, more animals and more animal feed are required. Most animal feeds are made from grains (mostly corn). One-third of the world grain production are diverted to livestock feed. So when more livestock are raised to meet the increased demand of meat, more grains would be diverted from human consumption as livestock feed.  Because lesser food is available to humans, food prices would increase.

The sixth rule of thumb is food prices measured in US dollars increase when the dollar weakens against other currencies and decrease when the dollar strengthens. Currency exchange rates have a strong effect on food prices. Between 2005 to 2008, for instance, the weak US dollar made US grains, oilseeds, meats, dairy products, fruits, and vegetables more affordable to consumers from other countries. The increased demand for US food items drove up food prices in that period of weak dollar. In contrast, in the year end of 2008, the US dollar strengthened against other currencies, making US food items less affordable to consumers elsewhere. This fall in demand for US food items drove down the food prices.

The seventh rule of thumb is market speculators can either raise or lower food prices but only in the short term. Futures market was created to enable farmers to sell their crops at a future date, at a guaranteed price. So, a speculator, for example, may believe that the price of corn may rise in the future. Thus, the speculator buys a futures contract when the price is low, hoping to sell it later when the price is high. If enough speculators follow suit to buy, this would drive up the price of corn due to the increase in demand. When the price of corn is high, this would encourage farmers to plant more corn. However, this would simultaneously discourage the use of corn such as for livestock feed and biofuel production. This eventually lowers the demand for corn and would finally push down the price of corn.

The last and eighth rule of thumb is unforeseen and sudden circumstances can affect food prices. Circumstances such as the recent the avian flu and mad cow disease were completely unexpected and caused a huge reduction in the demand for poultry meat and beef. Meat prices fell. Likewise, a hog disease known as PRRS (porcine reproductive and respiratory syndrome) spread rapidly in China in 2006 and 2007. To stop the spread of the disease huge numbers of hogs were killed and prices increased due to the lesser number of pork available.

Westhoff’s book is an essential reading material especially today with high food prices. However, I would like more analysis on the food crisis in 2008. Westhoff merely indicated what factors could cause high food prices without explaining in detail what he believed were the chief factors in causing the recent food crisis in 2008. Another negative is Westhoff’s book mostly focuses on the short term causes of high (or low) food prices. Since 2000, food prices have increased at an average rate of 5.9% per year. Westhoff, being an economist, would have realized this trend, but he discussed very little on the causes of this long term trend.

Nonetheless, both these shortcomings do not detract the usefulness of Westhoff’s book. In short, a highly recommended book.