IMPACT OF RISING FOOD PRICES

Impact of rising food prices

Impact of rising food prices

Introduction

The report discusses that International prices of basic food commodities have increased rapidly over the last three years. The FAO food price index rose by 9 percent in 2006 and by 23 percent in 2007. As of March 2008 wheat and maize prices were 130 and 30 percent higher than a year earlier. Rice prices have engaged in a steep upwards trend since the beginning of 2008. After recording relatively moderate increases of 9 percent in 2006 and 17 percent in 2007, the FAO All Rice Price Index gained 10 percent in February 2008 and another 10 percent in March. This situation poses a threat to food security in developing countries, and calls for urgent coordinated action by the international community and in particular by the United Nations. Without rapid and lasting reaction MDG 1 target for hunger reduction will be dramatically missed.

Causes of High Prices and the Medium-Term Outlook

World prices of wheat, coarse grains, rice and oilseed crops all nearly doubled between the 2005 and 2007 marketing years and continued rising in early 2008. These increases in agricultural commodity prices have been a significant factor driving up the cost of food and have led to a fuller awareness and a justifiably heightened concern about problems of food security and hunger, especially for developing countries.

The causes of this price spike are complex and due to a combination of mutually reinforcing factors, including droughts in key grain-producing regions, low stocks for cereals and oilseeds, increased feedstock use in the production of biofuels, rapidly rising oil prices and a continuing devaluation of the US dollar, the currency in which indicator prices for these commodities are typically quoted. This turmoil in commodity markets has occurred against the backdrop of an unsettled global economy, which in turn appears to have contributed to a substantial increase in speculative interest in agricultural futures markets.

Tight market conditions for essential agricultural commodities pose policy challenges for national governments as well as for international organisations. In order to take the right policy decisions, we need to understand what caused the current price spike, what the implications may be for prices and price volatility in the future, and how various countries and members of society may be affected. This note aims to improve this understanding and thereby to contribute to sound policy formulation.

The commodity price developments witnessed recently are certainly unusual when viewed from the perspective of the last decade or so, but less so when seen in a longer historical context. Two points are clear: first, agricultural commodity markets are notoriously volatile; second, the current price spike is neither the only nor even the most significant one to occur in the last forty years.

Prices rise when markets get tight. Between 2005 and 2007 there were coinciding spells of unfavorable weather in major producing regions in the world, pushing crop yields in those areas below long term average levels. World cereal output in 2007 was just 3% larger ...