Rising prices send signals to producers

The Bureau of Labor Statistics recently confirmed what most Americans have been noticing for some time: The price of food is rising.
 
Overall food prices increased by 4.9 percent in 2007; in the previous seven years the increase has averaged 2 percent annually. And the prices for staples like milk (19.3 percent), cheese (13.0 percent) and bread (10.5 percent) have risen dramatically.
 
The situation worldwide is even more serious. The World Bank estimates that food prices have risen 83 percent in the last three years, and the trend is predicted to continue. The World Bank wants to send $500 million in food aid to poorer countries. President Bush pledged $200 million from U.S. taxpayers.
 
While this kind of temporary food aid can help to stave off serious hunger, it also undermines the agricultural economies of recipient countries by reducing the incentive for their farmers to produce more.
 
Many developing countries have price controls on food, which further discourage farmers from increasing production. Eliminating those controls would be one constructive step poorer countries could take.
 
Certain factors, such as a significant drought in Australia that has reduced wheat production drastically, are beyond human control.

But leaders of poorer countries also have begun to complain about U.S. and European policies that subsidize ethanol and other biofuels. A fifth of the corn grown in the United States now goes to ethanol, which has increased the price and had a ripple effect on the supplies and prices of meat, soybeans, cooking oil and other commodities.
 
Eliminating the ethanol subsidy program wouldn't solve the world food crisis in a stroke, according to Sallie James, a trade policy analyst at the libertarian Cato Institute, but it would make a significant contribution.
 
The next most constructive thing the United States could do would be to eliminate its agricultural price-support program, which would untangle stalled trade negotiations (and reduce prices) and end tariffs and import controls on rice, dairy and sugar – all politically unlikely.
 
Rising prices send signals to farmers to produce more, which is how shortages become surpluses. But if the price signals are interrupted by subsidies, price controls and quotas, production seldom increases, so governments are reduced to stop-gap measures that may stave off starvation in the short run but prevent solutions in the long run.