What happened to global food prices?

Ajay Shah's Blog: What happened to global food prices? (HT: Marginal Revolution)

...Hypothesis: The spike in world food prices is caused by increased demand in China and India, particularly the shift towards consumption of meat as people get richer. My problem with this explanation is that it doesn't explain why the price index for major food crops was stable at 100 from 1990 till 2005, and spiked thereafter. China and India had a massive transformation of incomes and the structure of the food basket from 1990 to 2005.

Hypothesis: It's the evil speculators. Speculators who anticipated higher prices would have held more inventory. But the graph shows that inventories have dropped from 2000 onwards. There was less hoarding, not more. ...

...When demand is bigger than supply for a nonstorable commodity with zero short-term supply elasticity, prices would rise as much as is needed to close the gap. Demand can only shrink when some people get pinched and ease up on consumption. These are the poor. Poor people are the shock absorber that stabilise prices for non-storable agricultural commodities....

...GDP growth yields fewer poor people who respond to higher wheat prices by purchasing less meat or wheat, i.e. we have less of a shock absorber. That generates a reduced elasticity of demand of wheat. So prices have to rise by more in order to clear a supply-demand imbalance than was required in the past when there were more poor people who would adjust.

In the bad old days, people in China and India supplied the world with a large shock absorber, a large mass of poor people who tightened their belts when prices rose. This gave higher global demand elasticity and reduced price volatility. From the late 1970s, economic reforms in China and India have given greater affluence and thus diminished this shock absorber....

Comments

[Michele]

Thanks for the interesting post. I would like to add a slightly different story about the source of current price increases that emerges from analyses by the International Food Policy Research Institute (http://www.ifpri.org/).

The combination of new and ongoing forces is driving the world food situation and, in turn, the prices of food commodities. One emerging factor behind rising food prices is the high price of energy. Energy and agricultural prices have become increasingly intertwined. With oil prices at an all-time high of more than US$100 a barrel and the U.S. government subsidizing farmers to grow crops for energy, U.S. farmers have massively shifted their cultivation toward biofuel feedstocks, especially maize, often at the expense of soybean and wheat cultivation. About 30 percent of U.S. maize production will go into ethanol in 2008 rather than into world food and feed markets. High energy prices have also made agricultural production more expensive by raising the cost of mechanical cultivation, inputs like fertilizers and pesticides, and transportation of inputs and outputs.

At the same time, the growing world population is demanding more and different kinds of food. Rapid economic growth in many developing countries has pushed up consumers' purchasing power, generated rising demand for food, and shifted food demand away from traditional staples and toward higher-value foods like meat and milk. This dietary shift is leading to increased demand for grains used to feed livestock. Poor weather and speculative capital have also played a role in the rise of food prices. Severe drought in Australia, one of the world's largest wheat producers, has cut into global wheat production.

More on rising food prices and what can be done: http://www.ifpri.org/pubs/bp/bp001.asp