Why are current world food prices so high?

Jun 2008

The progressive rise of food prices over the past two years is of global concern, affecting all persons, and especially the poorest. Having a clear perspective on the several causes of this price increase is essential to avoid a policy response that could be counter productive. This guide through the factors currently influencing food prices will help to develop the appropriate policy mix to be implemented in the coming period.
The motivation at the origin of this memo can be summarised in four questions:
- Is the current price increase driven by real or monetary issues (notably a speculation phenomenon)?
- Are natural resource and basic food commodity prices linked together?
- Is the shortfall in production also linked to governance issues that limit investment and production?
- To what extent is the underused capacity in land and manpower a result of lack of investment capacity, both at the micro level (tools and seed) and at the macro level (storage and transportation infrastructure)?
The work on these questions allows the formulation of responses, and also some broader observations.
From the work it is clear that the price increases have several roots and that a normally functioning market will in time provide a certain degree of corrective action. But policy/political decisions can prevent the market from doing so. In any case, the time lapse for the market to act does not remove the acuity of the price distortion that affects the poorest people, and urgent intervention is necessary to alleviate the effects of short-term price peaks. Natural resource prices lead basic food commodity prices; the rate of growth of the former has historically been (and is again at present) higher than the latter. Biofuels create a more direct link between food and fuel prices, if fuel prices are high: the long-term trend of declining real food prices might be dampened or reversed.

By: M. Banse, P. Nowicki, H. van Meijl (LEI Wageningen UR)

 
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