Food prices around the world hit a new high in February, according to the United Nation's Food and Agriculture Organization's monthly Food Price Index released earlier today. The index, which has measured food prices since 1990, reached 236, up 2.2% month over month and up 57% over the past 12 months.
Part of the problem is the rising price of oil. Food prices and oil prices are inexorably tied together. Directly, most food, including grain, is grown and transported by oil-burning vehicles. Indirectly, as the demand for fuel rises and the price increases, more farmers have an incentive to plant corn for ethanol, thereby reducing the food grain supplies.Grain is a major player in the food price increases. Extreme weather -- droughts, floods -- hurt crops in major grain-producing countries like Russia this year, while increased prosperity in countries like China has increased demand. Along with this increased demand for grain is a demand for meat, which is produced in part by feeding animals grain. The FAO expects that grain demand will result in an even tighter market in 2011.
Sugar has also been on a steep climb since May of 2010, almost doubling in price since May 2010, up from 215.7 to 418.2. Again, bad weather in Australia, Brazil, China and India, coupled with increased demand, has produced rising prices.
Looking ahead, all eyes are on the price of oil. The FAO Director of Trade and Market Division David Hallam warns that "Unexpected oil price spikes could further exacerbate an already precarious situation in food markets."
Should turmoil in the Middle East drive prices to $200 a barrel, the price of food can do nothing but follow that trajectory.
Take the first steps to building your portfolio.View Course »