A new study by the World Bank found that food prices have increased 30 per­cent over the last year, dri­ving some 44 mil­lion people into extreme poverty since June. Grig­o­rios Livanis, assis­tant pro­fessor of inter­na­tional busi­ness and strategy at North­eastern Uni­ver­sity, assesses the problem.

Why are food prices increasing?

I believe the majority of the food price increases can be explained by market fun­da­men­tals (e.g., supply and demand fac­tors) and agri­cul­tural poli­cies in the U.S.

The growing use of corn in the pro­duc­tion of ethanol increases the demand for and thus the cost of corn. Increased corn prices influ­ence the cost of live­stock because corn is cen­tral to the pro­duc­tion of meat and poultry.

In addi­tion to the rising cost of corn, the price of all inputs used in the pro­duc­tion of food are about 17 per­cent higher in 2010 than in 2007. A major com­po­nent of this increase is higher fuel prices.

The increased costs of corn and fuel com­bined with pop­u­la­tion growth, higher income per capita around the globe, and strong demand for food prod­ucts — espe­cially for meat prod­ucts in emerging economies — help to explain the rise in food prices.

Some experts say that ram­pant price spec­u­la­tion on food by Wall Street invest­ment bankers has led to the dra­matic increase in prices for wheat, corn and sugar in coun­tries such as Egypt, Morocco and Pak­istan. What role has U.S. policy played in the crisis?

While com­modi­ties spec­u­la­tion may affect price volatility in the short run, I think that there are “fun­da­mental” or “agri­cul­tural policy” rea­sons for the increased prices, such as the emer­gence of ethanol. For instance, studies found that 30 per­cent of the rising food prices in 2007 were due to increased demand for bio­fuel, while about 67 per­cent could be attrib­uted to a rising stan­dard of living around the world.

In con­trast to the U.S. sit­u­a­tion, pro­ducers in devel­oping and emerging coun­tries did not seize the oppor­tu­nity from the increased food prices to raise pro­duc­tion. This was attrib­uted mainly to weak insti­tu­tions and avail­able tech­nology, lim­ited access to afford­able inputs, such as fuel and fer­til­izer, and trade bar­riers, such as tariff reductions.

Why haven’t U.S. con­sumers been sig­nif­i­cantly affected?

Given the afflu­ence of the U.S. con­sumer, the share of total expen­di­tures on food is rel­a­tively small, less than 10 per­cent. As a result, U.S. con­sumers are less dra­mat­i­cally affected by large price swings, whereas coun­tries like Egypt, Morocco, and Pak­istan have been more dra­mat­i­cally affected because food rep­re­sents a larger share of their budget. How­ever, eco­nomic reces­sions, espe­cially in con­junc­tion with rising food prices, may change how food is con­sumed. In devel­oped coun­tries, people will tend to eat more meals at home and less at restau­rants. In devel­oping coun­tries reces­sions might lead to decreased food con­sump­tion. If we are looking for a tan­gible impact of rising food prices on U.S. con­sumers, a recent report pre­dicts that gro­cery costs could rise by more than 4 per­cent in 2011.