If you think about Nike's
swoosh logo you have a
J-curve. Ag prices had been trending down in real terms for generations. Food was so cheap that farmers were on corporate welfare. This discouraged large scale investment into farming. Land was taken out of production. Capacity was not improved. Then we reached the bottom of the cycle for food, fuel and fertilizer. There is always a bottom. And we were all a little surprised at how quickly we started up the right hand side of that J-curve.
Its even worse in the developing world because along with those low food prices there were high inefficiencies that discouraged local production and favored subsidized imports. Lack of property rights and security farmers could not invest in better farming methods, buy fertilizer or get the best seeds. Look at the absolute chaos in Zimbabwe. The former bread basket of sub-Sahara Africa. Bio-fuels are not causing their economic problems. Political instability is. However, high food and fuel prices are making a bad situation worse.
I am absolutely convinced that the USA is on the wrong road using corn for ethanol. However, I do think it is hypocritcal to say on one hand "America is addicted to foreign oil" and on the other hand condemn each and every alternative energy strategy as being too little, too late and too inefficient. You have to start somewhere. I hope that somewhere results in many small break throughs. Even in cloudy Germany there are houses in Freiberg that are using 90% less energy than conventional houses. That may not solve our energy problems, but it sure is a step in the right direction. It is a necessary learning process.
So in any case even plain old economic speak if you redirect 25, 50 or 75-percent of your corn production from food and animal feed to energy production then, of course, according the laws of supply and demand the price for corn, and corn substitutes like wheat, oats and barley, will rise. Demand for food and feed is rising, while supply is falling as the surplus is redirected towards fuel production, which is another source of demand. That is pretty obvious. Any ten year old would tell you exactly the same thing. If you do not bring enough bubble gum for everyone there is a problem when demand exceeds supply.
Now the real problem is how to get land in the developing world into production. How to give farmers control over their land. To provide security so they are confident to invest. How to get the fertilizer and seeds to them by bypassing corrupt officials that extract bribes and taxes on such imports. How to take care of the urban poor that do not benefit from higher food prices. There is no shortage of problems to tackle. Rising food prices should be an economic bonanza for the developing world where a large percentage of the people are still involved in agriculture to one extent or another. They need real food security and not just sacks of food aid to get them through another season.
US Commodity Prices 1800-2008
UPDATE: I borrowed this chart from a PDF document. I apologize for the poor quality, but you can see how historically low commodity prices were prior to 2000. Well below their 100-year moving average. And still below were they were some 200-years ago. Click on full-size for best results.
The organized state is a wonderful invention whereby everyone can live at someone else's expense.