Price of Wheat is Soaring — Are We Reaching “Peak Food”?

by BWK ~ February 29, 2008

Price of wheat is soaring. So buying a loaf of bread is going to cost a lot more dough. What is happening?

Sure, we have lots of hungry mouths in this world. And more and more dollars are chasing those bushels of wheat, to feed those mouths. And couple it with the worldwide episodes of drought, and cropland destruction, and decline in soil fertility, and rising costs for seed and fertilizer and equipment. So just for reasons of limits on factors of production, It is harder and harder to increase supplies to match the growth in demand.

But look at what else is helping drive the price of wheat upwards.

Export traiffs.

Whoops. The traditional use for tariffs was to limit imports into a nation, and protect domestic markets against “cheaper” foreign competition. The idea was to protect domestic industry, and permit it to grow over time in a sheltered domestic market.

But now the use of tariffs is shifting to control exports. The intent of these export tariffs is to protect internal national supplies of a critical commodity.

But export tariffs are a two-edge sword. Tariffs may limit exports, of course. Export tariffs will limit sales into international markets. In doing so, they will support higher world market prices, because of limits to supplies in trade. And back home, export tariffs deny the benefits of higher world proces to the domestic producers. That is, the farmer receives a “lower” price signal. The taxing government is capturing the difference between internal and international prices, via the tariff. So there is less of a market incentive for the farmer to increase output, if that is otherwise possible.

It gets back to the classical economic argument that tariffs distort markets. In the case of export tariffs on food, they limit production at home while supporting artificially high prices on international markets.

Long term, tariffs are probably self-defeating. But that’s another discussion.

Read more on wheat’s latest rally, click here.

BWK