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Global Food Price Increases and Volatility

Global food prices continue to rise month after month, driven by longer-term and more recent trends. Financialisation is an important factor among the recent trends. There is strong evidence of correlation among the markets for different financial assets, including stocks/shares, commodities and currencies. Falling asset prices in other financial market segments may thus be more important for explaining the recent surge in food prices than supply constraints or changing demand and other factors underlying longer-term gradual upward price trends.





Global Food Price Increases and Volatility

Jomo Kwame Sundaram

Global food prices continue to rise month after month, driven by longer-term and more recent trends. Financialisation is an important factor among the recent trends. There is strong evidence of correlation among the markets for different financial assets, including stocks/shares, commodities and currencies. Falling asset prices in other financial market segments may thus be more important for explaining the recent surge in food prices than supply constraints or changing demand and other factors underlying longer-term gradual upward price trends.

Jomo Kwame Sundaram ( is with the Department of Economic and Social Affairs of the United Nations, New York.

lobal food prices increased for the eighth consecutive month in February 2011. The Food and Agriculture Organisation’s (FAO) Food Price Index averaged 236 points in February, up 2.2% from January, the highest recorded since the FAO started monitoring prices in 1990. Meanwhile, the World Bank food price index rose by 15% between October 2010 and January 2011, 29% above its level a year earlier, and only 3% below its 2008 peak. The World Bank estimates that rising food prices have driven an additional 44 million people into poverty in developing countries since June 2010 as food costs continue to rise to near 2008 levels. (The FAO index moved down a bit to 231 in March and stood at 232 in April.)

Lack of food is rarely the reason people go hungry. Even now, there is enough food in the world, but more people cannot affor d to buy the food they need. Even before the recent food price increases, an estimated billion people were suffering from chronic hunger, while another two billion were experiencing malnutrition, bringing the total number of food-insecure people to around three billion, or almost half the world’s population.

The rapid and simultaneous rise in world prices for all basic food crops – corn

may 28, 2011

(maize), wheat, soybeans, and rice – along with other foods like cooking oils is having a devastating effect on poor people all over the world. Almost everybody’s standard of living has been reduced as the middle class becomes increasingly careful about its food purchases, the near poor

drop into poverty, and the poor suffer even more. With increased hunger and malnutrition, the young, old, infirm and other vulnerable groups will die prematurely or be harmed in other ways.

Longer-term and more recent developments need to be distinguished to understand and address the current global food crisis.

Longer-Term Trends

The major increases in crop yields and food production associated with the quest for food security and the green revolution from the 1960s to the 1980s – with considerable government and international notfor-profit support – gave way to new policy priorities in the 1980s. Agricultural experts have warned of the risks of the flagging efforts to boost food output for years.

As food supply growth slowed, demand continued to grow, not only due to population increase but also for other uses. In recent years, the world has been consuming more grain than it has been producing, cutting into reserves and driving up prices.

The problem has been exacerbated by the significant drop in official development assistance for agricultural development in developing countries. Aid for agriculture fell in real terms by more than half in the quarter century after 1980, e g, the World

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Bank cut its lending for agriculture from $7.7 billion in 1980 to $2 billion in 2004.

Agricultural research and development has fallen for all crops in all developing countries, as cuts in agricultural research continue. As budgets have been cut, spending on plant-breeding programmes – needed to improve crop productivity – has declined.

The green revolution involved a global network of research centres focusing on agriculture and food production, primaril y in developing countries. These research centres have experienced significant budget cuts. Meanwhile, agribusinesses spend much more on agricultural research than all such institutes together.

As the new conventional wisdom holds that a free market economy, with minima l government interference, would be bette r, governments stopped subsidising farmers or being involved in the marke tin g, storag e and transportation of food, or credit provision. Meanwhile, rich countrie s have continued to subsidise and protect their farmers, and their agricul tura l subsidies and tariffs have undoubtedly undermined food production in deve loping countries.

Many developing countries’ governments now also lack the fiscal capacity to increase public spending in order to incre ase food production and agricul tural productivity. In recent decades, many developing countries have implemented reforms which have greatly reduced policy space.

The World Bank and the World Trade Organisation still claim that agricultural trade liberalisation offers the best mediumterm solution to the current food crisis even though eliminating food subsidies will raise food import costs in the short term. Since the 1980s, governments have been pressed to promote exports to earn foreign exchange and import food. While this may help a country’s balance of payments, export-oriented agriculture does not ensure sufficient food.

Hence, instead of developing their own agriculture, many poor countries have turned to the world market to buy cheap rice and wheat. Some countries previously self-sufficient in food now import large quantities of food. The WTO’s Doha Round does not envisage a very significant reduction of agricultural subsidies and tariffs,


but would further undermine national food security measures while ensuring greater international dependence on relatively few major food exporters.

Other Factors

Meanwhile, other medium- and long-term factors have contributed to the current food crisis including:

  • Climatic changes associated with accelerated greenhouse gas emissions are believed to have exacerbated water supply problems, speeding up desertification and water stress, and worsening the unpredictability and severity of weather phenomena. Weather has adversely affected agriculture in many parts of the world.
  • Forests have long been an important source of food (e g, forest fruit, ferns,
  • tubers, fauna) for many rural dwellers living close to subsistence. The international community has failed to develop equitable deterrents to deforestation and incentives for forest conservation.
  • Growing population pressure, urbanisation, other non-agricultural uses of land as well as the attraction of non-food
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    Economic Political Weekly


    agricultural production have reduced farm acreage available for food production, while agricultural land is increasingly used to produce commodities other than food, such as biofuels.

  • Soil erosion is slow and insidious, with ominous implications for agricultural productivity in the long term. Pressures on commercial farmers to maximise their net agricultural incomes threaten soil quality and soil conservation efforts.
  • Water supplies are also under threat as underground aquifers and other sources of water supply are being depleted or compromised.
  • Finally, fewer and fewer transnational agribusinesses now dominate marketing, production, and inputs. Transnational corporations that process agricultural commodities, manufacture and sell food as well as agricultural inputs enjoy increasingly monopolistic and monopsonistic market power, enjoying attendant rents.
  • Growing demand for meat among those newly able to afford meat has increased the use of food crops to feed livestock.
  • Overfishing is reducing this important animal protein source for many; the consequently higher fish prices further deprive and burden the poor and near poor.
  • As such, longer-term trends worsened over recent decades, setting the stage for a food emergency.

    Recent Developments

    The acceleration of growth in developing countries in the last half-decade has been associated with high primary commodity, especially mineral, particularly oil, prices

    – rather than agriculture.

    Among agricultural commodities, world food prices have risen more since 2006, especially with the flight of investment from other financial assets to agricultural futures. Nevertheless, recent agricultural price increases have barely reached the average post-war prices in most cases. Some recent reasons for the rising food prices are as follows: ƔIncreased oil prices have also affected food prices. Commercial agriculture uses a great deal of oil and natural gas for runnin g machinery, producing chemical fertilisers and pesticides, drying crops and transportation. ƔIn the west, crops are increasingly being grown to produce biofuels, reducing the use of these crops for food. Some bio-fuels are clearly far more cost-effective and energy-efficient than others, while different biofuel stocks have very different opportunity costs for food agriculture (e g, sugar has not experienced any significant price increase). Developed countries have provided generous subsidies and other incentives for such increased biofuel production while developing countries encouraging biofuel production have provided far less “market-distorting incentives” to farmers.

    Hence, the debate over biofuels in relatio n to food availability needs to be far more nuanced, differentiated and specific if we are not to throw the renewabl e energy baby out with the bathwater of some undoubtedly poor biofuel subsidy policies.

    Price Volatility

    Speculation and hoarding have also been contributing to the food price spikes. In addition, more securitisation, easier online trading, and other financial market developments in recent years have accelerated financialisation and facilitated greater speculative investments, especially in commodity futures and options markets, including food. As the US financial crisis deepened and spread from late 2007, speculators started investing in food and metals to take advantage of and augment the “commodities super cycle”.


    Meanwhile, the US dollar’s decline relative to other currencies has also induced more investments in commodities instead. There is strong evidence of correlation among the markets for different financial assets, including stocks/shares, commodities and currencies. Falling asset prices in other financial market segments may thus be more important for explaining the recent surge in food prices than supply constraints or changing demand and other factors underlying longer-term gradual upward price trends.

    Commodity futures and options markets were originally developed to smoothen and stabilise prices, which they largely succeeded in doing. In recent years, indexed commodity funds and other similar investment strategies have been strongly pro-cyclical in effect, thus exacerbating price volatility.

    Furthermore, the massive infusion of finance due to greater leveraging and capital flight from other financial asset markets has put upward pressure on future and current prices. But many of these processes can be reversed, with downward price pressures instead, thus exacerbating rather than mitigating price volatility. The compound effects of these recent market developments appear to have further exacerbated commodity price volatility.

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