Trade factors are major trigger of food prices hikes, says IFPRI

The causes of the 2007-8 food crisis, which drove hundreds of millions of people into poverty around the world, are generally identified as higher oil prices, biofuels demand, shifting Asian diets, less agricultural research, slower yield growth, low stocks, macroeconomic imbalances, droughts, and export restrictions.

“Whilst a few of these explanations can be directly or indirectly linked to trade events, few if any observers have emphasized trade shocks as ‘the great uncertainty’ underlying the most recent volatility in food prices,”​ wrote Derek Heady of the International Food Policy Research Institute’s Addis Ababa office in a paper accepted for publication by the journal Food Policy​.

“Was this most recent crisis fundamentally different from earlier food crises, or are trade shocks still a central feature of international price volatility?”​ he asked, noting that rice price surges followed export restrictions in India and Vietnam.

The other comparable food crisis in living memory, in 1973-4, also had several recognised root causes and trade issues are among them. For instance, in 1972 the Soviet Union purchase unprecedented levels of wheat from the United States.

To answer his question, Heady examined monthly data from Thailand, the largest rice exporters, and the United States, the largest exporter of wheat and maize and a major exporter of soybeans. He found that in all cases except soybeans price surges followed surges in export volumes.

Short run trade shocks were seen to be “pervasively important in all of the major grain markets (with knock-on effects on soybeans)”​ and “arguably provide the most tangible explanation for the overshooting dynamics apparent in price series data”.​

Other factors should not be ruled out however, Heady said, as there are important interactions, and the non-trade factors “probably still played important roles in creating initial pressures in grain markets, which in turn contributed to export restrictions and import surges.”​

Prevention measures​

Greater controls on financial speculation, such as curbing over-the-counter trading, are amongst measures now being employed to help protect commodity markets against future crises.

But while Heady says regulation of commodity futures markets may not do much harm, he suggests that policy efforts may be best directed towards free trade policy. However determining the best trade policy is not easy as WTO agreements do not prohibit food-export restrictions and poor producing countries may not be keen to rule out export restrictions.

“Second-best strategies”​ may therefore come into play, such as achieving self-sufficiency, larger monetary or stock reserves, and bi-lateral or regional agreements.

Don’t rule out random shocks​

Heady also questioned predictions from the FAO and the OECD that slow-moving pressures like oil prices, biofuels, and economic growth will keep food prices between 40 to 50 per cent higher than 2000 levels for the next ten years.

He warned that simulations have not taken into account the cumulative effect of such slow moving pressures, and that they can trigger trade actions that result in tighter global supply.

“We suggest that economic modelers would do well to consider endogenizing trade shocks, or at least exploring how random shocks might affect their predictions. ​

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“In our view these kinds of trade shocks are like the elephant in the room – too large​

and too important to ignore.”​

Source​

Food Policy (online ahead of print)

Doi:10.1016/j.foodpol.2010.10.003

‘Rethinking the global food crisis: The role of trade shocks’​

Author: Derek Headey