International prices of basic food commodities have increased rapidly over the last three years.
Five reasons explain the increase in food prices. First, world cereal production fell by 3.6 percent in 2005 and 6.9 percent in 2006 due to bad weather in major producing countries.
Second, stock levels are very low, which magnifies the impact of production shortfalls as markets worry about the lack of a buffer. The ratio of world cereal ending stocks in 2007/08 to the trend in world cereal utilization is estimated at 18.7 percent, the lowest in three decades.
Third, petroleum prices and food prices are highly correlated, with an estimated correlation coefficient of more than 0.6. The rapid rise in petroleum prices exerted an upwards pressure on food prices as fertilizer prices nearly tripled and transport costs doubled over a two-year period.
Fourth, increased demand from the biofuels sector also tended to push prices upwards. It is estimated that about 100 million tonnes of grain (some 4.7 percent of global cereal production) are being used for biofuels in 2007/8. In 2007/8, the United States alone is expected to use about 80 million tonnes of maize to produce ethanol, a 37 percent increase over the previous year.
Fifth, economic growth in some large developing countries is leading to changes in diet and increased demand for food crops. Over the last 15 years, meat consumption more than doubled in China and grew by 70 percent in Brazil and 20 percent in India. Since it takes some 7 kg of cereals to produce 1 kg of meat, this shift in diet is also leading to higher cereal prices.

By: Food and Agriculture Organization of the United Nations (FAO)

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