Food Crisis: reasons and solutions

By team IT&LT United

Agenda

• Short Overview • Microeconomics revisited • Ethanol

OverviewSubsidies Tariffs

• Future perspective – problems and solutions

Short Overview

Food prices have raised dramatically

Why? Role of technology, productivity

Mystery

Source: Food and Agriculture Organization of the United Nations (www.fao.org)

Microeconomics revisited

Before year 2004∆Supply(technology) > ∆Demand

After∆Supply < ∆Demand

Q(food)

P(food) S

D

Microeconomics Revisited

Raising demand: • Developing countries (population, preferences)

• Shift in tastes (vegetables – inferior goods?) Raising supply? • Progress in technology continues, yet DMR• Changes in use of land (food vs. biodiesel)

Ethanol: overview

C2H6O – produced by fermenting sugars from

food crops (canes, wheat, sunflower seeds)

major use - as biofuels reduces air pollution (cleaner emissions)

contributes to mitigate global warming

Brazil – as a largest exporter

Source: The Economist

75% of its ethanol output is still sold at home Why??

Ethanol: subsidies in USA & Europe

USA - a fixed rate of 45 cents/gallon of ethanol ($316 million over the life of a typical ethanol plant)

EU - approximately 1$/gallon

“The ethanol subsidy is worse than you can imagine„- Robert Bryce

Flawed production towards inefficient use of land Local producers , yet foreign producers (Powell & Schmitz, 2005) Local consumers of ethanol LR effect of raising food prices (Joseph E. Stiglitz, 2006) Gov’t worse off as (T-G) deteriorates and DWL created (overproduction) Pareto inefficient (Pandey, 2005, Arya, 2010)

Ethanol tariffs – a case of sugar cane

Brazil's sugar cane-based industry is more efficient than the U.S. and EU corn-based industry

Brazil – appreciated supplier (climate, land, know-how) harvests ~600 billion tons/year using 2.5% of arable land began using ethanol in vehicles in the 1920s

So, tariffs of 25% by value (USA) and 50% by value (EU) Yet, trade barriers make this good unavailable in USA & Europe

Lobbies are better off,Consumers are worse off

Future perspective: problems/solutions

Distorted land use

Increasing food prices and higher volatility

Environmental problems

Increasing inequality

(society big farmers)

Inefficient income transfers

Possible repetition of the food crisis

FREE TRADE

Thank you for your attention.

Questions?