284 – The world food price crisis of 2007

In 2007, the world prices for a number of important food commodities suddenly increased dramatically. Many reasons for the price hike were proposed at the time, but some of them turned out to have little to do with it. One factor that did play a big role was American policy that mandates use of biofuels.

Between 2006 and 2008, the price of rice increased by around 200%, and the prices of maize, wheat and soybeans all increased by over 100%.

food_prices

Figure 1. Index of food prices since 1990.

 

It was estimated that this big jump in food prices pushed an additional 130-155 million people into poverty. People rioted in protest at the high food prices in various countries, including Bangladesh, Mozambique, Egypt, Tunisia, Senegal, Zimbabwe and Haiti.

A number of possible reasons for the price rises were identified, including:

  • Increasing oil and energy prices
  • Drought and climate change
  • Panic buying
  • Export restrictions
  • Increased demand for food in Asia
  • Biofuel policies

food_riotIt was felt at the time that it was the combination of all these things that did the damage. There were so many factors thought to have contributed that some described the situation as a “perfect storm”.

However, we now have the benefit of hindsight and it’s clear that some of these factors played little or no role in the price spike (Wright 2014).

It’s true that the oil price spiked in the first half of 2007, just before the food price spike, so there is at least a smoking gun. Higher oil prices would have increased the cost of agricultural production to some degree, and this could have been passed on to buyers. However, Wright argued that this sequence of events (high oil prices followed by high food prices) was largely coincidence, not a causal link. He noted that prior to this event, there was no notable relationship between oil and food prices:

The 1970s oil spike began after the spike in grain prices was well under way, and another huge oil price surge starting in 1978 had no counterpart in the grain market. The sharp but forgotten spike in maize and wheat in 1996 was not matched by a similar movement in oil prices. When energy prices doubled after 1998, grain prices on average barely moved until 2006. (Wright 2014, p. 546).

If drought or adverse climate change was a significant cause, we would have seen significant declines in global food production in 2007-08. People observed that there was a big reduction in Australian grain production at just this time, due to the long drought in the Murray Darling Basin. However, Wright showed that there was no major decline in aggregate global production for any of the three major grains, so other countries must have had production increases that offset Australia’s shortfall. Furthermore, looking at past spikes in food prices, he found that (back to 1962) none of them coincided with large production shortfalls. This is intriguing, because a shortage should in theory cause a price increase, but it seems to have been overwhelmed by other factors in past years at least.

There was “panic buying” by several countries (Bangladesh, The Philippines, Nigeria and some Gulf countries) who increased stocks in an attempt to contain local food prices. This may have made a temporary contribution to higher prices on world markets, but it probably wasn’t a major factor. As evidence of that, I note that panic buying soon ceased, but prices remained high for several years (until about 2014).

A number of countries that traditionally have been exporters of cereal grains imposed a ban on exports during the crisis: Argentina, China, India, Egypt, Pakistan, Russia, Ukraine and Vietnam. This would have reduced the supply of grain in international markets. The World Trade Organisation and International Monetary Fund estimated that prices would have been 13% lower without these restrictions.

Increased demand for food in Asia, especially China, probably contributed. Higher incomes led to higher demand for meat, which led to higher demand for grain to feed to livestock, particularly soya beans. Higher prices for one grain flows through to other grains through substitution in demand. Wright noted that the evidence about the role of higher food demand in pushing up prices in 2007-08 is complex and somewhat confusing, but that it probably did play some role.

Finally, we have biofuels policy, particularly the US policy that caused large volumes of corn to be diverted away from food and livestock production and into the production of ethanol for use as a transport fuel. Although this was ignored by many commentators at the time, it undoubtedly played a significant role in the food price jumps. In addition to pushing up food prices, this policy increased the area and intensity of corn production, which probably led to increased environmental damage in the forms of water pollution, soil erosion and biodiversity loss. And, tragically, even in terms of its contribution to abatement of greenhouse gases, it was (and still is) a very poor policy. The climate benefits provided are small and very expensive.

One lesson from this is that we need to be careful in drawing conclusions about the reasons for changes in market prices. It is easy to be misled by simple correlations, such as that between 2007 oil prices and food prices. A plausible story is not sufficient evidence.

Another lesson is the importance of thinking through policies before committing to them. The failure to do that for biofuels policy in the US and Europe probably resulted in them doing more harm than good.

Further reading

Wright, B.D. (2014). Data at our fingertips, myths in our minds: recent grain price jumps as the ‘perfect storm’, Australian Journal of Agricultural and Resource Economics 58, 538-553. Journal web site ♦ Ideas page for this paper

12 Comments

  • 6 October, 2015 - 6:46 am | link

    Quentin Grafton from the Australian National University sent me a recent paper by him and Hang To in which they investigate the impact of biofuel production and oil prices on food prices over the period 1981-2013. They agree with Brian Wright that biofuel policy had a big influence, but interestingly they disagree with him about oil prices, which they find to be even more influential than biofuel production. “… we demonstrate that both higher oil prices and increased biofuels production have raised food prices, and that this has contributed to global poverty and chronic undernourishment.” The difference may be because To and Grafton do a formal statistical model, whereas Wright’s conclusions are based on visual observations of the data. Sometimes a statistical model will find trends that are obscured because there are several changes going on at once. On the other hand, some of Wright’s observations are from before 1981. If these earlier years were included in To and Grafton’s model, perhaps the estimated influence of oil prices would be reduced.
    To, H. and Grafton, Q. (2015). Oil prices, biofuels production and food security: past trends and future challenges, Food Security 7, 323-336.

    • 6 October, 2015 - 8:03 am | link

      A comment by Quentin (via email) on possible reason for the difference: “Wright fails to consider the ratchet effect associated with higher oil prices which accentuate the effects of biofuel subsidies. Basically, higher oil prices encourage production that would have gone into food to go into biofuels. At low oil prices no or very little substitution occurs, in the absence of subsidies or fuel mandates.”

  • 6 October, 2015 - 6:49 am | link

    A recent book that reinforces the message about biofuels:

    The Economics of Biofuel Policies: Impacts on Price Volatility in Grain and Oilseed Markets

    Harry de Gorter, Dusan Drabik, and David R. Just

    ISBN 9781137414854
    Publication Date April 2015
    Publisher Palgrave Macmillan

    The global food crises of 2008 and 2010 and the increased price volatility revolve around biofuels policies and their interaction with each other, farm policies and between countries. While a certain degree of research has been conducted on biofuel efficacy and logistics, there is currently no book on the market devoted to the economics of biofuel policies.

    The Economics of Biofuel Policies focuses on the role of biofuel policies in creating turmoil in the world grains and oilseed markets since 2006. This new volume is the first to put together theory and empirical evidence of how biofuel policies created a link between crop (food grains and oilseeds) and biofuel (ethanol and biodiesel) prices. This combined with biofuel policies role in affecting the link between biofuels and energy (gasoline, diesel and crude oil) prices will form the basis to show how alternative US, EU, and Brazilian biofuel policies have immense impacts on the level and volatility of food grain and oilseed prices.

  • Nicole Chalmer
    15 October, 2015 - 7:17 pm | link

    The price of P fertiliser jumped dramatically in 2008 – tripled /quadrupled. As cattle producers who apply P to pastures if the price hike had been maintained further we would have been forced to cease production as the price was too high for economic beef production.

    Peak Phosphate is the elephant in the room for Australian and particularly Western Australian agriculture. Without P, farming in the south -west of WA would not be possible.

    • 22 October, 2015 - 4:17 pm | link

      I have a video about peak phosphorus here:
      https://www.youtube.com/watch?v=puNj53SSsqY
      It’s tries to present a balanced picture on how serious (or otherwise) the threat of peak phosphosus is. It’s about 13 minutes long.

      • 8 November, 2015 - 5:51 pm | link

        thanks David,
        will watch this when I have time – in between writing a PhD, harvest, cattle sales, exhibition work etc.!

        regards Nicole

  • Margaret
    30 June, 2016 - 3:35 am | link

    I have witnessed this in today’s press brief here in Kenya maize price has risen and it is becoming unbearable for ordinary citizens to put a meal on the table.The government argues there’s enough maize in the cereal stores to feed the nation while the business people says it is of poor quality.

  • Janvier NDAYISABA
    9 October, 2016 - 4:38 am | link

    If biofuel caused large volumes of grains and cereals to be diverted away from food and livestock production and into the production of fuel and there is no change in fuel price, then biofuel policies should have been revised

    • 9 October, 2016 - 7:11 am | link

      Sorry Janvier but I don’t understand your comment. The point is that biofuel policy did influence prices.

  • Awoyele Adebayo Adedamola
    15 December, 2016 - 2:45 am | link

    The prices of the world major cereals also increased in Nigeria despite the panic buying as expressed in this article. We as country produce these cereal, however the production in still at a minimal stage in Nigeria especially wheat

  • Opoku-Agyei Isaac
    26 January, 2017 - 8:37 pm | link

    Once again, policies must be thoroughly assessed before they are implemented. It is suggested in Ghana that, a political party lost 2008 election because of the 2007 food price crisis. David, I would like to know if (1) the price hike benefited the exporting countries and and impacted negatively on importing countries (2). Is there any global food policy that would ensure that food commodities are not diverted into the production of none food commodities which will result in food crisis? 3 . Can global food poisoning be suggested one of the causes of the price hike? I’m not familiar with any global food poisoning in around 2007 though. I’m sure you will help me if any.

    • 7 March, 2017 - 9:30 pm | link

      1. Yes, sellers benefited and purchasers suffered.
      2. The problem was a policy that actually encouraged diversion of crops from food to non-food. They just need to shut down that policy. They still need to do so. It’s a terrible policy, even from the narrow perspective of climate change abatement (which is what it is supposed to help with).
      3. I don’t know anything about food poisoning. I haven’t previously heard of that as an issue.

  • Leave a Reply

    Your email address will not be published. Required fields are marked *

    Please solve this to show you\'re a real person *