Can the Recent Increases in Food Prices Actually be a Good Thing?

The Financial Times recently reported about Abu Dhabi's plan to invest in agriculture in the developing world. There are other stories out there of a similar nature. So, could the rise in food prices actually be a good thing?

The food system seems to be broken. American policies with regard to using corn to produce ethanol most likely have a distorting effect, but there are more general problems. Populations continue to grow, but critically they are also growing wealthier. In some developing countries, people are eating significant quantities of meat for the first time. Because meat takes a significant amount of grain to grow and grain is already expensive, the price effect is magnified in meat products. The increasing consumption of meat also puts additional pressures on grain supplies.

Moreover, inefficient farming practices hurt productivity that could help the market to bear increasing demands and help to staunch rising prices to a degree. There are other inflationary pressures and transport costs are a factor as well, but there's no denying that the world could benefit from improved farming practices, both from a monetary aspect and an environmental aspect. For instance, poor irrigation methods waste water.

Take Morocco as an example. It has the same percentage of arable land as the United States and grows significant quantities of wheat and other products, but farms are often small holdings and archaic techniques are used. These techniques cannot be improved without modern equipment and infrastructure. So, the rise in food prices is encouraging investment in the sector. This investment may help to improve farming efficiency, thereby helping to improve harvests and reduce waste. The investment may force a move to larger, more industrial farms. This will undoubtedly cause some dislocation, as it has elsewhere in the world, but ultimately it may help to improve the country's economy overall and allow some people to move to more productive sectors if economic policies are integrated intelligently.