Another Food Crisis? Not If We Think This Through.

With all the news of floods in Australia decimating the country’s wheat crop and adverse weather in the US cutting corn and soybean harvests, commodities prices across the globe are again seeing drastic increases, raising fears that we may be witnessing a return of widespread food insecurity and subsequent political and economic turmoil. Moreover, the FAO’s recent statement that global food prices reached a record high in December 2010 has sparked the memory of the crisis in 2007–08 and turned global attention back to the issue of food security.

But the current situation is not the same as it was in 2007–08, the key reasons being: (a) there is still sufficient production and stocks of wheat, (b) oil prices are still not at the levels of 2008, (c) rice production is doing well and there are sufficient rice reserves, and (d) countries are not implementing policies that could put more pressure on prices – such as export bans in key exporting countries or a reduction of import tariffs in key importing countries.

True, the signs look worrying for wheat and corn. Russia’s ban on wheat exports will continue in 2011, and Australian floods will affect the quality of the country’s wheat crop and downgrade the grain to animal feed (Australia exports around 11% of the world’s wheat, a similar share to what Russia used to export); however, the reduction of export taxes in Argentina could partially compensate for this. Overall, wheat production in 2011 will depend on the weather in the coming months. The bulk of the coarse grains and paddy crops are not due to be planted for several months, but we should expect some volatility. In the case of corn, the situation is more complex, given the increase in demand for biofuels (based in large part on the new biofuels mandates in the US) and the potential reduction of exports from Argentina (the second largest exporter of corn). This is complicated by the fact that the global corn market was already extremely tight. There is also significant pressure from the fact that commodities are measured in US dollars; since 2008, the FED has printed significant amounts of USD for expansionary policies that affect the exchange rate and therefore can partly explain the increase in prices.

However, the biggest things to fear, and guard against, are political and market overreaction and extreme price volatility, such as were observed during the first weeks of August and December 2010. Such moves evoke 2007–2008, when more than a dozen major food producers halted or restricted exports. This was meant to protect domestic markets as staple prices soared and global grain stocks fell to record lows, but it put even more pressure on commodity prices, beggaring and starving poor consumers in other countries. Global market stability was sacrificed at the altar of domestic politics.

We now know more than we did in 2007–08 in terms of how and to what extent prices are transmitted from global to domestic markets. We expect positive transmission effects in the case of wheat in Latin American and Asian countries, although the key commodity for Asia will be rice. In Latin America, in the case of bread, the average transmission elasticity is about 0.20, which means that a 1 percentage point increase in the growth rate of the international price of wheat translates into a permanent increase of 0.20 percentage points in the growth rate of the domestic price of bread. In the case of wheat in Asia, the biggest transmission effect is found in Bangladesh (0.74), followed by Pakistan (0.41), and Vietnam (0.11). Watch IFPRI Research Fellow Miguel Robles discuss the price situation in Latin America and Asia .

In Africa, on the other hand, staple food prices have different levels of transmission. Major price transmission in Africa occurs with rice prices, which are more closely linked than maize prices to world markets. This is good news, given that rice prices are not currently in surge. We do not expect significant transmission for maize, or major transmission for wheat in Northern Africa. Watch Senior Research Fellow Nicholas Minot discuss the price situation in Sub-Saharan Africa .

We also now have tools in place to measure and analyze the causes and effects of changes in food prices, accessible through the Food Security Portal , facilitated by IFPRI. Commodities graphs track global prices dating back to 1998 and provide daily returns on futures prices. Annotated commodity price timelines provide a simple visual explanation of past and present behavior of four main commodity markets ( soft wheat , hard wheat, maize , rice , and soybeans ), combining time series of commodity prices with other related information such as real-time news stories and synopses of major events related to global commodity price fluctuations. A Terms-of-Trade Effect tool provides a quick and easy way to assess the country-level impact of a change in world commodity prices, while a Short-Run Impact of Releasing Food Stocks simulator allows users to model the impact of a release of stocks of a particular commodity. A welfare simulator provides a simple modeling tool to assess the effects of changing prices and crop production on local communities’ welfare.

Such tools are essential in helping policymakers understand how to mitigate the risk of another food crisis and how knee-jerk reactions can act to make such a crisis worse. If governments and markets start taking things in stride, as appears to be the case, this should be good news for consumers—especially for poor consumers in developing countries who spend much or most of their income on food. The last thing poor populations need now is a rash of speculation or the ad hoc protectionism that has been both a cause and effect of past price crises.