Q & A: UC Berkeley professor discusses rising food prices

Is food inflation here to stay?

In the past year, retail food prices have increased 4.4 percent, well above the long-term average of 2.5 percent, with the costs of many items – bread, eggs, milk – rising at double-digit percentage rates.

Behind those numbers are global-scale shifts in food supply and demand, says David Zilberman, who has followed agricultural trends for nearly 30 years as a professor of agricultural and resource economics at the University of California, Berkeley.

Q: What are the main factors driving food-price increases?

A: No. 1 – I think the biggest one – is increasing income and demand in Asia. And we have another drought in Australia, which is a big food exporter.

Then we have biofuels. Ethanol has increased the price of corn, but it has also led to increases in the prices of other crops. But altogether, biofuels don't have such a large impact on food prices, maybe only 15 percent of the total increase.

Q: Are U.S. food prices more affected by rising global commodity prices than they have been in past decades?

A: The big difference today is the exchange rate. The U.S. is a food exporter and as the dollar goes down, prices automatically go up, because a lot of the stuff is sold internationally. That is quite a significant impact.

Q: How do high oil prices play into the economics of food?

A: When it comes to the supermarket, the main impact is in transportation costs. Food is voluminous – it's not diamonds. So the transportation cost per unit volume is quite high. If supermarkets have higher transportation costs, you pay for it.

When oil is expensive, the costs of food production also go up. But (global) food prices have gone up more than oil prices, and oil is only a fraction of the cost of producing food, so, I think, most of the issues with food prices are issues of demand, of biofuels and things like that.

Q: How long do you think these high prices will last?

A: Inventories are very low, and that tells you that this is not going to end quickly. To some extent, I think things could get worse. Let's suppose that we have a drought next year, and we've already started with low inventory. Then we have a disaster.

But I also think there are a lot of opportunities to expand agricultural production – in Eastern Europe, in Southeast Asia, even Africa. A lot of people that have been thinking about investing in agriculture will go ahead. People in Eastern Europe will say, hmm, maybe we should upgrade our activities. The nice thing about the market is that people really respond to what's going on.

And people can adopt biotech, people can adopt other types of technology. So, to some extent, supplies will increase and prices will return to some sort of normality, but it will take two or three years.

Q: What are important agricultural trends to watch in the future?

A: To me, the key element is adaptability. That basically, we keep the environment going, and we fight to adapt in the most effective way. We need to have incentives against pollution, against waste, against greenhouse gases, against all this other stuff, but at the same time we need to allow people the freedom to be creative and to increase our resource space.

You don't need to take a lot of risks, but you need to be able to take some risks and increase supply. And you need to have the right incentives. When land can be utilized, reduce the barriers. When technology can be utilized, reduce the barriers. Identify what are the important environmental issues and address them.

The same with biofuels. Don't subsidize them – let them compete with other fuels.

Another thing is, gosh, if you can reduce demand, get people to eat less meat, all those things would be great.

Something that I think is really crucial is that we are paying the price for slowing development of genetically modified organisms (GMOs). What type of food has jumped the most? Wheat, and in many countries rice. The fact that we don't have GMOs in wheat and rice is a problem, for two reasons.

If you had GMO wheat or rice, you could increase the yield by 5 or 10 percent. A 10 percent increase in yield is a lot.

The other thing is that because of the heavy regulation and the (anti-GMO) atmosphere, industry really slowed investment. This is really crucial, because once investors realized that, gosh, this is really difficult and we can't make money in this, they moved to other areas. And that really stopped people from introducing new varieties that would have generated, say, drought tolerance.

It's not biotech per se – it's that we didn't take advantage of technology and our productivity hasn't grown as much as it could have.

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