Initial causes of the late 2006 price spikes included droughts in grain-producing nations and rising oil prices. Oil price increases also caused general escalations in the costs of fertilizers, food transportation, and industrial agriculture. Root causes may be the increasing use of biofuels in developed countries (see also food vs fuel), and an increasing demand for a more varied diet across the expanding middle-class populations of Asia.
These factors, coupled with falling world-food stockpiles all contributed to the worldwide rise in food prices Causes not commonly attributed by mainstream views include structural changes in trade and agricultural production, agricultural price supports and subsidies in developed nations, diversions of food commodities to high input foods and fuel, commodity market speculation, and climate change.
Drastic price increases
Between 2006 and 2008 average world prices for rice rose by 217%, wheat by 136%, corn by 125% and soybeans by 107%.[9] In late April 2008 rice prices hit 24 cents (U.S.) per U.S. pound, more than doubling the price in just seven months.
World population growth
Growth in food production has been greater than population growth. Food per person increased during the 1961–2005 period.
Although some commentators have argued that this food crisis stems from unprecedented global population growth, others point out that world population growth rates have dropped dramatically since the 1980s, and grain availability has continued to outpace population. However, despite production gains made in the last decade, world food demand outpaces any production increases.
According to Joachim von Braun, of the IFPRI, total food production increases only about 1 to 2 percent per year, while total world population increases approximately 4%. Aggregate cereal grain food production, per capita, had risen yearly from the 1960s to the 1980s but has been in decline since. However, this does not take into account any non-food uses of grain production.
World population has grown from 1.6 billion in 1900 to an estimated 6.8 billion .
Increased demand for more resource intensive food
The head of the International Food Policy Research Institute, stated in 2008 that the gradual change in diet among newly prosperous populations is the most important factor underpinning the rise in global food prices. Where food utilization has increased, it has largely been in processed ("value added") foods, sold in developing and developed nations. Total grain utilization growth since 2006 (up three percent, over the 2000–2006 per annum average of two percent) has been greatest in non-food usage, especially in feed and biofuels.
One kilogram of beef requires seven kilograms of feed grain. These reports, therefore, conclude that usage in industrial, feed, and input intensive foods, not population growth among poor consumers of simple grains, has contributed to the price increases.
2005/1990 ratios of per capita consumption
India China Brazil Nigeria
Cereals 1.0 0.8 1.2 1.0
Meat 1.2 2.4 1.7 1.0
Milk 1.2 3.0 1.2 1.3
Fish 1.2 2.3 0.9 0.8
Fruits 1.3 3.5 0.8 1.1
Vegetables 1.3 2.9 1.3 1.3
Although the vast majority of the population in Asia remains rural and poor, the growth of the middle class in the region has been dramatic. For comparison, in 1990, the middle class grew by 9.7 percent in India and 8.6 percent in China, but by 2007 the growth rate was nearly 30 percent and 70 percent respectively. The corresponding increase in Asian affluence also brought with it a change in lifestyle and eating habits, particularly a demand for greater variety, leading to increased competition with western nations for already strained agricultural resources. This demand exacerbates dramatic increases in commodity prices such as oil.
Another issue with rising affluence in India and China was reducing the 'shock absorber' of poor people who are forced to reduce their resource consumption when food prices rise. This reduced price elasticity and caused a sharp rise in food prices during some shortages. In the media, China is often mentioned as one of the main reasons for the increase in world food prices. However, China has to a large extent been able to meet its own demand for food, and even exports its surpluses in the world market.
Effects of petroleum price increases
The rise in the price of oil has heightened the costs of fertilizers (in some instances doubling the price within the six months before April, 2008), the majority of which require petroleum or natural gas to manufacture. Although the main fossil fuel input for fertilizer comes from natural gas to generate hydrogen for the Haber–Bosch process (see: Ammonia production), natural gas has its own supply problems similar to those for oil. Because natural gas can substitute for petroleum in some uses (for example, natural gas liquids and electricity generation), increasing prices for petroleum lead to increasing prices for natural gas, and thus for fertilizer.
Costs for fertilizer raw materials other than oil, such as potash, have themselves been increasing as increased production of staples increases demand. This is causing a boom (with associated volatility) in agriculture stocks.
The major IFPRI Report launched in February 2011 stated that the causes of the 2008 global food crisis were similar to that of the 1972-74 food crisis, in that the oil price and energy price was the major driver, as well as the shock to cereal demand (from biofuels this time), low interest rates, devaluation of the dollar, declining stocks, and some adverse weather conditions. Unfortunately the IFPRI states that such shocks are likely to recur with several shocks in the future; compounded by a long history of neglecting agricultural investments.
Declining world food stockpiles
In the past, nations tended to keep more sizable food stockpiles, but more recently, due to a faster pace of food growth and ease of importation, less emphasis is placed on high stockpiles. For example, in February 2008 wheat stockpiles hit a 60-year low in the United States (see also Rice shortage). Data stocks are often calculated as a residual between Production and Consumption but it becomes difficult to discriminate between a de-stocking policy choices of individual countries and a deficit between production and consumption.
Financial speculation
Destabilizing influences, including indiscriminate lending and real estate speculation, led to a crisis in January 2008, and eroded investment in food commodities. The United States, specifically, had been facing an economic crisis that eventually led to recession.
Financial speculation in commodity futures following the collapse of the financial derivatives markets has contributed to the crisis due to a "commodities super-cycle." Financial speculators seeking quick returns have removed trillions of dollars from equities and mortgage bonds, some of which has been invested into food and raw materials. That American commodities speculation could have a worldwide effect on food prices is reflected in the globalization of food production. It represents the concentration of wealth throughout the world, which Frances Moore Lappé equates to a weakening in fundamental democracy. In a recent article for The Nation, she suggests that there is no food shortage but that "as long as food is merely a commodity in societies that don't protect people's right to participate in the market, and as long as farming is left vulnerable to consolidated power off the farm, many will go hungry, farmers among them—no matter how big the harvests."
Commodity Index Funds
Goldman Sachs' entry into the commodities market via the Goldman Sachs Commodity Index has been implicated by some in the 2007–2008 world food price crisis. In a 2010 article in Harper's magazine, Frederick Kaufman magazine accused Goldman Sachs of profiting while many people went hungry or even starved. He argued that Goldman's large purchases of long-options on wheat futures created a demand shock in the wheat market, which disturbed the normal relationship between Supply and Demand and price levels. He argues that the result was a 'contango' wheat market on the Chicago Mercantile Exchange, which caused prices of wheat to rise much higher than normal, defeating the purpose of the exchanges (price stabilization) in the first place.
In a June 2010 article in The Economist, the argument is made that Index-tracking funds (of which Goldman Sachs Commodity Index was one) did not cause the bubble. It describes a report by the Organisation for Economic Co-operation and Development that used data from the Commodity Futures Trading Commission to make the case. For example the report points out that even commodities without futures markets also saw price rises during the period. The counter-argument to this view is that the commodities without futures markets saw their prices rise as a consequence of the rising prices of commodities with futures markets: the World Development Movement states there is strong evidence that the rising price of wheat caused the price of rice to subsequently rise as well.
Effects of trade liberalization
Some theorists, such as Martin Khor of the Third World Network, point out that many developing nations have gone from being food independent to being net food importing economies since the 1970s and 1980s International Monetary Fund (and later the World Trade Organisation's Agreement on Agriculture) free market economics directives to debtor nations. In opening developing countries to developed world food imports subsidised by Western governments, developing nations have become dependent upon food imports that are cheaper than what local smallholders agriculture produces, even in the poorest regions of the world.
While developed countries pressured the developing world to abolish subsidies in the interest of trade liberalization, rich countries largely kept subsidies in place for their own farmers. In recent years United States government subsidies have been added to push production toward biofuel rather than food and vegetables .
Effects of food for fuel
One systemic cause for the price rise is held to be the diversion of food crops (maize in particular) for making first-generation biofuels. An estimated 100 million tons of grain per year are being redirected from food to fuel. (Total worldwide grain production for 2007 was just over 2000 million tonnes.) As farmers devoted larger parts of their crops to fuel production than in previous years, land and resources available for food production were reduced correspondingly.
This has resulted in less food available for human consumption, especially in developing and least developed countries, where a family's daily allowances for food purchases are extremely limited. The crisis can be seen, in a sense, to dichotomize rich and poor nations, since, for example, filling a tank of an average car with biofuel, amounts to as much maize (Africa's principal food staple) as an African person consumes in an entire year.
Brazil, the world's second largest producer of ethanol after the U.S., is considered to have the world's first sustainable biofuels economy and its government claims Brazil's sugar cane based ethanol industry has not contributed to the 2008 food crises. A World Bank policy research working paper released in July 2008 concluded that "...large increases in biofuels production in the United States and Europe are the main reason behind the steep rise in global food prices", and also stated that "Brazil's sugar-based ethanol did not push food prices appreciably higher". An economic assessment published in July 2008 by the OECD disagrees with the World Bank report regarding the negative effects of subsidies and trade restrictions, finding that the effect of biofuels on food prices are much smaller.
A report released by Oxfam in June 2008[54] criticized biofuel policies of rich countries and concluded that, of all biofuels available in the market, Brazilian sugarcane ethanol is "far from perfect" but it is the most favorable biofuel in the world in term of cost and GHG balance. The report discusses some existing problems and potential risks and asks the Brazilian government for caution to avoid jeopardizing its environmental and social sustainability. The report also says that: "Rich countries spent up to $15 billion last year supporting biofuels while blocking cheaper Brazilian ethanol, which is far less damaging for global food security." (See Ethanol fuel in Brazil)
German Chancellor Angela Merkel said the rise in food prices is due to poor agricultural policies and changing eating habits in developing nations, not biofuels as some critics claim. On April 29, 2008, U.S. President George W. Bush declared during a press conference that "85 percent of the world's food prices are caused by weather, increased demand and energy prices", and recognized that "15 percent has been caused by ethanol". On July 4, 2008, The Guardian reported that a leaked World Bank report estimated the rise in food prices caused by biofuels to be 75%. This report was officially released in July 2008.
Since reaching record high prices in June 2008, corn prices fell 50% by October 2008, declining sharply together with other commodities, including oil. As ethanol production from corn has continue at the same levels, some have argued this trend shows the belief that the increased demand for corn to produce ethanol was mistaken. "Analysts, including some in the ethanol sector, say ethanol demand adds about 75 cents to $1.00 per bushel to the price of corn, as a rule of thumb. Other analysts say it adds around 20 percent, or just under 80 cents per bushel at current prices. Those estimates hint that $4 per bushel corn might be priced at only $3 without demand for ethanol fuel." These industry sources consider that a speculative bubble in the commodity markets holding positions in corn futures was the main driver behind the observed hike in corn prices affecting food supply.
Second- and third-generation biofuels (such as cellulosic ethanol and algae fuel, respectively) may someday ease the competition with food crops, as can grow on marginal lands unsuited for food crops, but these advanced biofuels require further development of farming practices and refining technology; in contrast, ethanol from maize uses mature technology and the maize crop can be shifted between food and fuel use quickly.
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