On Thursday last week, the US Department of Agriculture (USDA) held its annual Outlook Forum, the world’s biggest agricultural sector gathering, where it released its forecasts for corn, wheat and soyabean prices for 2011-12.
Recent years have seen the prices of these commodities reach record highs, triggering food riots in some developing countries. Basic economics tells us that high prices will lead to an increase in supply, which should bring prices back down again. And this is what has happened, but only in part.
The US exports more than half the world’s corn and has a large share of other key markets. So what happens in the US matters a lot. As we would expect in a situation of high prices, this year has indeed seen a big increase in crops planted, but the USDA forecasts that this will not be sufficient to bring prices down – supply is increasing, but so is demand.
Why is demand for food increasing?
The question of what is driving this demand, and so creating upward pressure on food prices, is the subject of much debate, some of it very heated.
- The most basic explanation is that rising global population and increasing affluence in some parts of the developing world is the core driver.
- Another explanation is that increasing amounts of crops are going to non-food uses, particularly biofuels - the US ethanol industry accounts for 36 per cent of the national grain crop, for example.
- For some, financial ‘speculators’ seeking to profit from high prices are piling into the food markets, driving up prices but also exacerbating volatility as argued by the World Development Movement and UNCTAD.
- For others, such as the OECD, there is no link between these activities and the prices that people actually pay, and new financial actors bring beneficial liquidity to these markets.
How do policies affect the market?
The growth of the biofuels sector is in large part a product of subsidies to the sector. If financial actors are playing a role, this is because regulation – or the lack of it – does not prevent them from doing so.
Taking a long-term approach
If ever there was a market that needed a long-term, strategic approach with a focus on development outcomes, it is the global food market. To be able to do this, however, we need to dramatically improve our understanding of what factors are driving prices, and to organise markets to ensure that prices are reasonable and relatively stable.
We are a long way from this at the moment...