International Business Case Chapter 5

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Why Did Global Food Prices Rise?

Case Summary

For the past 25 years, food prices have been declining due to increased productivity and output from the farm sector worldwide. In 2007 however, this changed. There are two main explanations to this. The first is an increased demand for food in rapidly developing nations such as China and India. Meat in particular has contributed to the rising prices as farmers have to feed their animals an extensive amount of grain in order to keep up with the meat production. Secondly there is the issue of bio-fuel subsidies. As both the European Union and the United States have adopted policies on the production of ethanol and bio-fuel to combat the problem of global warming, they are now giving subsidies to farmers to promote increased production. The subsidies have resulted in a larger production than what is needed for bio-fuel production, and thus also a reduced number of other crops not subsidized for bio-fuel production. Complicating the problem further is current high tariffs on other products that can be turned into bio-fuel, such as the sugar cane. This is unfortunate as this crop is seen as a more environmentally friendly way of producing bio-fuel as the production requires mostly waste material, namely the fiber removed from the cane in sugar production. Both the European Union and the United States would like to see a continuing growing production of bio-fuel, but neither part have shown willingness to reduce or remove the high tariffs.

Questions & Answers

1)Who benefits from government policies to (a) promote more production of ethanol and (b) place tariff barriers on imports of sugar cane? Who suffers as a result of these policies?

Farmers who produce corn and soy beans profit from this government policies, because increasing demand of these crops makes the price go up. Also, they gain subsidies for producing crops, which decreases their production costs. By collecting taxes from crop...
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