Global Food Prices - Food Crisis

This post was originally written and published on the blog for the Civicus Assembly

What causes rising food prices? And how do we stop it from outpacing inflation?

Some suggest that recent increases in global food prices are being driven by increases in the world's human population - that the increases, in both, are linked and inevitable. By their account our population simply outstrips the capacity of our environment to support sustainable food production. There are those who believe that mandated, legislated zero population growth is the only way we can ensure enough for all and keep the planet from being "used up".

While slowing or stopping population growth will likely assist in meeting the sustainability of the planet and people in the long term, it’s unlikely that long-term population growth is the driving factor of recent food price fluctuations. If population growth was the engine of inflation in food prices, one would expect a gradual increase rather than leaps and spikes.

Other explanations are more complex. They point to the role played in food price energy costs - e.g. fertilizer, farm equipment and food distribution. These links are the centre of a recent report by the World Bank. Energy does impact the price of food, no question, but is it the primary driver, given that prices took another big jump in the last 6 months, without similar changes in the cost of oil?

There is, as well, the contribution of issues at the supply end, related to poor harvests (which can cause hoarding by both farmers and consumers), or changes in crops grown. Those issues, are strongly dependent on environmental factors, including flood or drought, but also because choices about what to grow and where to grow it can be (sometimes unreasonably) influenced by national policies and subsidies. This is the narrative focused on by a recent story in the Financial Times detailing the poor grain harvest in Russia this year, and the subsequent global rise of grain prices, especially of flour. Russia’s decision to ban grain exports in response has resulted in shortages elsewhere. The Times suggests that:

Tight supplies, changing weather patterns and rising demand in emerging economies have all contributed to rising concerns about food security.

Not a word in these explanations, however, about what Civicus website visitors identified as the most likely culprit -- financial speculation. And, all of these explanations also ignore other dimensions of each of these issues including the contribution of climate change (as does a recent BBC report decreasing on rice harvests) monoculture, overuse of chemical fertilizers and herbicides and pesticides, not to mention GMO's . . . and a failure to develop agricultural policies that are going to meet the needs of those that farm - rather than far away consumers.

A July 2010 article in Harper's , entitled The Food Bubble: How Wall Street Starved Millions and Got Away with It, the author, Frederick Kaufman, argues pretty convincingly that the creation of a commodities index for grain helped fuel speculation, and that as food prices rose so did the index. The short version, which he presents in an interview with DemocracyNow, of his analysis is that massive investments by banks in wheat futures led to prices that were not 8%, but up to eight times higher than usual. The result? He says in part:

FREDERICK KAUFMAN: How did this work? Instead of a buy-and-sell order, like everybody does in these markets, they just started buying. It’s called "going long." They started going long on wheat futures. OK? And every time one of these contracts came due, they would do something called "rolling it over" into the next contract. So they would take all those buy promises they had made and say, "OK, we still—we’re just going to—we’ll buy more later. And plus we’re going to buy more now." And they kept on buying and buying and buying and buying and accumulating this unprecedented, this historically unprecedented pile of long-only wheat futures . . . Now, a lot of people are saying, "Oh, it was biofuel production. It was drought in Australia. It was floods in Kazakhstan." Let me tell you, hard red wheat generally trades between $3 and $6 per sixty-pound bushel. It went up to $12, then $15, then $18. Then it broke $20. And on February 25th, 2008, hard red spring futures settled at $25 per bushel. . .

. . .

And, of course, the irony here is that in 2008, it was the greatest wheat-producing year in world history. The world produced more wheat in 2008 than ever before.

. . .


JUAN GONZALEZ: And the result was, as the price went up, that there were food riots around the world.

FREDERICK KAUFMAN: Yeah.

You can watch the interview with Kaufman here. You can also read Goldman - Sach's letter defending themselves, and the author's response.

On addressing the contribution of speculation to 2008’s food price increases, and subsequent food riots, however, Kaufman is not alone. here’s an excerpt from the conclusions of another recent report from the World Bank, Placing the 2006/08 Commodity Price Boom into Perspective:

In this paper we examined three key factors whose role has been somewhat controversial: speculation, the growth of demand for food commodities by emerging economies and the role of biofuels. We conjecture that index fund activity (one type of “speculative” activity among the many that the literature refers to) played a key role during the 2008 price spike. Biofuels played some role too, but much less than initially thought. And we find no evidence that alleged stronger demand by emerging economies had any effect on world prices. Although tentative, these conclusions provide insights into the determinants of
the future path of commodity prices, which is still uncertain.

Food and markets - prices, sovereignty, security, availability - are all connected and all complex. Raj Patel briefly outlines some of the causes here. Speculation has contributed, surely, but Patel points that so too has the exposure to the volatility inherent in exposure to world markets as a result of liberalization of trade:

In 2009, Raj Patel and Eric Holt-Giménez, released a book, Food rebellions! Crisis and the Hunger for Justice. The precis of the book suggests that democratizing food systems and making society work for everyone is part of the answer:

Food Rebellions! suggests that to solve the food crisis, we must change the global food system — from the bottom up and from the top down. On one hand, farmers utilising sustainable approaches to production need to be supported, and farmer-to-farmer agroecological knowledge must be spread. At the same time, food and farm advocates need to work in local, national and international policy arenas to open dialogue, demand transparency and change the 'rules' currently holding back agroecological alternatives. The book frames the current food crisis as a unique opportunity to develop productive local food systems as engines for sustainable economic development. Hunger and poverty, the authors insist, can be eliminated by democratising food systems and respecting people's right to safe, nutritious and culturally appropriate food and to food-producing resources — in short, by advancing food sovereignty.

There are many other possible answers…what do you think? What is the most important cause of increasing food prices? What can we do to make sure that everyone can afford, and ultimately has enough, to eat?

Following publication of this blog I received this article: Food Commodities Speculation. . .   which does talk about the rise of food prices based on speculation.  It was written by:

Olivier De Schutter was appointed the UN Special Rapporteur on the
right to food in March 2008 by the United Nations Human Rights
Council. He is independent from any government or organization, and he
reports to the Human Rights Council and to the UN General Assembly.
All reports are available on http://www2.ohchr.org/english/issues/food/
annual.htm. See http://www.srfood.org for a thematic classification
of all reports and statements of the Special Rapporteur. The Special
Rapporteur can be contacted on srfood@ohchr.org