Food price inflation is at its highest level in decades and many countries are taking policy action to try to address the problem. Some of these policies are more likely to be effective than others, and many could have significant side effects.
There is no single cause for the rapid rise in food prices over the past year. Factors as diverse as the unfavorable weather conditions for the war in Ukraine or the tightening of the labor market have all played a role.
Supply issues are part of the problem, and some of the proposed solutions to rising food prices attempt to boost food supplies. For example, the crisis in Ukraine has reduced wheat supply on world markets, and several countries are trying to find ways to encourage increased wheat supply.
The Biden administration has proposed two policy changes intended to boost wheat plantings. Crop insurance subsidies would be increased for farmers who plant winter wheat this fall and then plan to plant a second crop of soybeans after the wheat harvest next summer.
The second would increase benefits for wheat and soybean producers under the marketing loan program. This program offers low interest loans and a degree of protection against low market prices.
Both of these proposals could encourage a few more farmers to double-crop wheat and soybeans this year, but the proposed subsidies are small compared to the value of wheat production. In other words, the current high wheat prices are likely to do much more to encourage wheat production next year than the proposed policies will.
Others have proposed changes to the conservation reserve program (CRP) to encourage greater production of wheat and other crops. The program pays farmers for unused cropland, usually for a period of 10 years. This provides a variety of environmental benefits, from reducing soil erosion to providing wildlife habitat, but also has the effect of reducing crop supply and increasing crop prices.
Limiting new CRP enrollments and making it easier to exit land from the program would make more land available for planting wheat and other crops. The short-term effects on crop supply may be limited, however, as it is unclear how many current CRP contract holders are eager to end their contracts. High crop prices have already discouraged new CRP registrations.
Other countries have tried to limit food exports to moderate domestic food prices. Indonesia, for example, announced what is expected to be a temporary ban on palm oil exports in an attempt to reduce high domestic cooking oil prices.
Such measures can help reduce domestic food prices, but by limiting supply in world markets, they can actually increase prices paid by consumers in other countries.
There are many other ways to fight inflation in general and food price inflation in particular. Tackling supply chain bottlenecks, anti-competitive behavior and costly regulations can reduce the prices paid by consumers while increasing the prices paid to farmers.
Of course, monetary policy is another tool to reduce inflation. When the Federal Reserve takes action to raise interest rates, the expected result is reduced consumer demand for everything from new homes to food.
The Fed faces a tough challenge in braking hard enough to slow inflation without causing a major recession. The coming months could indicate whether the Fed is able to stage a “soft landing”.
Pat Westhoff is director of the Food and Agriculture Policy Research Institute at the University of Missouri and a professor of agricultural and applied economics. The opinions expressed here are his own and do not reflect official positions or endorsements of the University of Missouri.
