Food price surges trigger alarm bells

Large and rapid increases have occurred for many food commodity prices during 2010-11.

This year, many food commodity prices had climbed above 2008 peaks, a rare occurrence within three years.

Although there have been wide swings in food commodity prices in the past, they usually occurred six to eight years apart. The short period between the last two price surges raises concerns.

The 2010-11 price surge is the sixth spike in four decades.

While the current price surge is still evolving, in each of the first five price spikes since 1970, large increases in agricultural prices were followed by sharp declines. In the 1975 and 2008 spikes, prices only declined to a new plateau above historical average levels.

In 2002, world food commodity prices began increasing, reversing a 20-year downward trend. In early 2007, price increases accelerated, and by June 2008, the monthly food commodity price index compiled by the International Monetary Fund was up 130 percent from January 2002, then dropped by a third the next six months.

A similar price pattern emerged in early 2009 when the food commodity price index slowly began to climb. After June 2010, prices shot up, and by January 2011, the index exceeded the previous 2008 price peak.

By April 2011, the monthly index had risen 60 percent over the preceding two years.

For four basic crops – wheat, rice, corn and soybeans – price fluctuations were greater than for the total food commodity index.

By June 2010, the four-crop index had fallen, while the food commodity index rose.

From December 2008 to June 2010, lower prices for the four crops were offset by increasing prices for sugar, vegetable oils, meats and other commodities.

Between June 2010 and March 2011, the four-crop index rose 70 percent, compared with 39 percent for the food commodity index.

Bread-quality wheat, corn, sugar, and vegetable oils saw the largest price increases. Rice prices rose very little, whereas in 2007-08, rice prices rose more than the prices for any other commodity.

Non-agricultural prices increased even more than food commodity prices. Energy, metals, beverages, and agricultural raw materials prices rose during 2002-2008 and then declined sharply after peaking in mid-2008.

Since the low points, prices for these nonfood commodities have risen more than the food commodity index, and all commodities but crude oil surpassed their 2008 peaks.

The simultaneous swings in agricultural and nonagricultural prices suggest that global, economy-wide factors contributed to the surge in prices in both periods.

Conditions for a spike

A number of long-term trends in agricultural production and consumption laid the groundwork for the 2010-11 price surge.

These included global population and per capita income growth, declining value of the US dollar, increasing world per capita consumption of animal products, slower growth in world crop yields, rising energy prices, and growing global biofuel production.

Over the past decade, the world’s population increased by more than 77 million people a year. A large portion of this increase occurred in developing countries, which also have seen a rapid growth in per capita incomes.

As their incomes increase, consumers in developing countries increase per capita consumption of staple foods and diversify their diets to include more meats and dairy products, increasing the demand for grains and oilseeds used for feed.

The US dollar’s depreciation in 2002-08 facilitated growth in exports from the United States and put upward pressure on world commodity prices. Then, the dollar’s appreciation, combined with the world economic recession, coincided with declining world prices in 2008-09, followed by renewed depreciation, economic growth, and rising prices after 2009.

The increase in biofuel production – ethanol in the United States and Brazil and biodiesel production in the European Union, Argentina, and Brazil – has played a role in raising prices for corn, sugar, rapeseeds, and soybeans as well as for other crops.

Growth in global biofuel production has slowed considerably from rates exceeding 30 percent per year in 2005-08. Nevertheless, production continues to increase, and the shares of grain used for ethanol and vegetable oils used for biodiesel, relative to total use, continue to climb.

While the expansion of biofuels was an important factor underlying the general rise of food commodity prices in 2002-08 and their movement to a higher plane, it is less clear how much impact biofuels production have had in the 2010-11 surge in prices.

Probably the most significant factor contributing to the increase in staple food prices in 2010 and 2011 was a series of adverse weather events. A severe drought in Russia and parts of Ukraine and Kazakhstan reduced production of all 2010 crops, particularly wheat.

In late summer 2010, dryness and high temperatures during the grain- filling period reduced yield prospects for US corn. About the same time, rain on nearly mature wheat crops in Canada and northwestern Europe reduced the quality of much of the crop to feed grade.

Adverse weather conditions continued, threatening 2011 production. Drought in Russia significantly reduced winter wheat plantings for the 2011 crop. By April 2011, estimated global aggregate grain and oilseed stocks had fallen and the stocks-to-use ratio was almost down to the 2007-08 level and close to the 40-year low.

Meat prices, which did not contribute to higher 2002-08 food prices, did play a role in the recent increase. When feed costs increased in 2002-08, livestock producers responded by slowing production.

As world economic growth rebounded in 2009 and 2010, consumers demanded more meat and prices began to rise. Beef and pork production could not respond in the short run because of multiyear cattle and hog production cycles. Thus, meat prices began to increase nearly a year before crop prices renewed their upward trend. Source: Amber Waves September 2011

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