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Market Forces Impact World Food Prices


Soaring global food prices have been blamed on factors ranging from biofuel production, rising oil prices and export curbs to supply and demand, tight commodity markets and investor speculation. Most experts say no one reason is to blame and that an array of forces have distorted global markets.

According to the United Nations, global food prices have increased 45 percent in the past nine months. Global wheat prices have soared more than 180 percent in the past three years, while the price of rice has risen 76 percent this year alone. As a result, the world's poorest countries could face a 56 percent increase in their cereal import bill this year.

This situation reminds analyst Chuck Pierson of Investor Commodity Services in Minnesota of the 1970s, when the United States sold large quantities of wheat and corn to the Soviet Union, which was facing drought and bad harvests.

"It's different, but there are some similarities, if you go back to 1972 when we had the 'The Great Russian Grain Robbery' with the corn. They drove corn up to four dollars, which was unheard of. It's a little different than what we've got going on today. It's a demand-driven market, but it is worldwide," says Pierson. "So it's maybe more of a sustained trend than it was years ago. But we had wild speculation back in those days and everything is proportional to the size of the market. But it does look like it's a little bit more sustained this time with the demand."

Supply and Demand

Despite last year's record harvest in some countries, bad weather and drought in others have slashed global rice supplies. And Dean Baker, Co-Director of the Center for Economic and Policy Research in Washington, says growing demand is now using up the world's overall grain stocks and outstripping production.

"There are real supply and demand side factors, which are aggravated by speculation, by restrictions on trade. On the supply side, we've had bad news in terms of rice harvests in Australia, in Japan and a few other countries that have diminished the supply, at least temporarily. We also have had a switch to biofuels that has pulled land out of food production, most importantly corn. We are diverting land to produce some biofuels," says Baker. "On the demand side, we are seeing growth. We are seeing increased demand from China and India as they grow wealthier."

David Lehman of the CME Group, a commodities firm that formed after last year's merger of the Chicago Mercantile Exchange and the Chicago Board of Trade, says growing wealth in developing countries like China and India means more demand.

"It's hard for the rest of the market to fathom just what impact that would have. There are billions of people in that part of the world that suddenly have more disposable income. So there's greater demand for meat, which is greater demand for livestock feed, for corn and soybeans. It's very difficult for the market to know how quickly that supply will be needed. And high prices do that," says Lehman. "That's exactly the role of the market."

Distorting the Market

Many developing nations began banning grain exports last year. Some experienced riots as food prices soared beyond the reach of many of the world's poorest people. Trade restrictions only aggravate the situation, says economist Maximo Torrero of the International Food Policy Research Institute in Washington.

"Argentina, Cambodia, China, Ethiopia, India -- all these countries, which are producers and some are net exporters -- are putting barriers to trade. It is a reaction by the countries to protect themselves because, of course, it could have political effects and so they can consume at a lower price," says Torrero. "That creates a pressure because these products are not going to the market and therefore it creates a restriction over the supply, which also increases the prices. If all the markets were operating freely -- there were not these distortions -- then we would know clearly what is the correct price."

Torrero adds that export curbs make up only one part of a whole set of factors that have distorted global food prices. "Biofuels could explain about 30 percent of the increase. The trade barriers are between 20-to-25 percent, and the rest could be because of increasing demand. This is not bringing into account potential speculation, which is difficult to prove. But the more distortions we put into the market, the more complex it will become," says Terrero. "This is like a country with hyperinflation. When you have hyperinflation, you have a lot of distortion in prices. So it's very difficult to have the real prices in place. So we need to make the market clear and, therefore, the market forces move ahead."

Tomorrow's Prices

Torrero and other analysts argue that lifting export restrictions and increasing food production will return equilibrium to the market and help lower prices. But economist Chad Hart of Iowa State University's Center for Agricultural and Rural Development says food prices are unlikely to return to their previous levels.

"We do expect these higher commodity prices, higher than historical levels, to remain for quite some time, mainly riding on two long-term impacts. One is the world's ever increasing demand for food products as we have a larger population within the world and that population is achieving higher and higher levels of income. That means demand for more and more food," says Hart. "At the same time, those people are also demanding energy. And so this underlying energymand [i.e., energy demand] looks to be long-term as well. And given both those growth factors, we would expect prices to remain higher than they have been historically."

Hart expects the market to respond to high food prices within a year or two with increased production that might slow down the migration from rural areas to urban centers in the developing world.

This story was first broadcast on the English news program, VOA News Now. For other Focus reports click here.

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