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Underlying Causes of the Global Food Crisis

September 5, 2012

ImageFor those readers who haven’t seen it yet, Timothy Wise at Triple Crisis has an outstanding analysis of the global food crisis. Responding to a recent article in The Guardian, Wise argues that too many myths are being perpetuated about the root causes of the sharp increase in global food prices over the past several years.

Wise is right to note that the myth that the primary driver of global food prices is the changing dietary preferences of the new middle class in India and China. When then President George W. Bush concluded that increasing demand for more protein-intense diets in India and China were causing world food prices to go up in 2008, as I’ve argued elsewhere,  this view misses the fundamental drivers. Several studies, including one by The Guardian’s Jayati Ghosh, one by Timothy Wise, and one by the UN’s Food and Agriculture Organization all independently conclude that recent spikes in global food prices have occurred independently of increasing demand for cereals. In other words, while demand for meat in India and China may have increased, it did not create a demand shock leading to the recent spikes n global food prices.

Wise notes that the dramatic expansion of biofuel production, particularly the promotion of corn-based ethanol production in the United States and the expansion of biodiesels in the European Union likely play a far bigger explanatory role than changing diets. Some 15 percent of the global corn supply (and some 40 percent of US corn production) goes to ethanol production, creating a very tight supply market. Indeed, the National Academy of Sciences estimates that 20 to 40 percent of the 2008 grain price increases were the result of biofuel production.

As the UN Special Rapporteur on the Right to Food Olivier de Schutter concluded two years ago, the root cause of recent food price increases must also be found in food commodity speculation. As de Schutter observes, “there is a reason to believe that a significant role was played by the entry into markets for derivatives based on food commodities of large, powerful institutional investors such as hedge funds, pension funds and investment banks, all of which are generally unconcerned with agricultural market fundamentals.” In other words, a speculative bubble is at the heart of recent price spikes. Again quoting de Schutter

[A] number of signs indicate that a significant portion of the price spike was due to the emergence of a speculative bubble. Prices for a number of commodities fluctuated too wildly within such limited time-frames for such price behavior to have been a result of movements in supply and demand: wheat prices, for instance, rose by 46% between January 10 and February 26, 2008, fell back almost completely by May 19, increased again by 21% until early June, and began falling again from August20. The 2008 food price crisis was unique in that it was possibly the first price crisis that occurred in an economic environment characterized by massive amounts of novel forms of speculation in commodity derivative markets…The changes in food prices reflected not so much movements in the supply and/or demand of food, but were driven to a significant extent by speculation that greatly exceeded the liquidity needs of commodity markets to execute the trades of commodity users, such as food processors and agricultural commodity importers.

Similar conclusions were also reached by the Institute for Agriculture and Trade Policy, the World Development Movement, and by yours truly

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