THE WORLD FOOD PRICE SPIKE of 2008 Colin Thirtle, Imperial College London Jenifer Piesse, King s College London

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1 THE WORLD FOOD PRICE SPIKE of 2008 Colin Thirtle, Imperial College London Jenifer Piesse, King s College London Chris Gilbert, University of Trento commodities Jeremy Woods, Imperial College London biofuels Tim Josling, Stanford University trade policy Alan Swinbank, University of Reading trade policy Nick Vink, University of Stellenbosch Ferdi Meyer, University of Pretoria supply response in South Africa/FAPRI model Phil Pardey and Julian Alston, Minnesota and UC Davis World R&D, Technology and Productivity Growth Peter Street, DEFRA UK situation

2 Consultations IFPRI Joachim von Braun World Bank Don Mitchell USDA Ronald Trostle Keith Collins IMF FAO OECD/FAO Agricultural Outlook Josef Schmidhuber 30/50 forecasts Moral Hazard? Chris Gilbert commodities

3 A STRUCTURED ACCOUNT OF THE PRICE SITUATION - WITH CAUSALITY Long decline in food prices relative to nonagricultural prices Huge price spike in 1970s due to oil crisis 2008 prices are nothing like the 1970s levels and then prices resumed the long decline But about 5 million died action needed Need to separate the spike factors from those driving the long term trend (60/40?) Slow, long run changes do not cause sudden large price spikes

4 The Long Fall in Farm Output Prices Relative to All Prices, US Long-Run Time Series (1998 is less than 25% of 1945 price) Doug Gollin and Robert Evenson Relative Price of Farm Goods Year

5 Long Run Decline in Food Prices Price Dt 1 Demand, shifts caused by income, population, product innovation Dt 2 Dt 3 St 1 St 2 St 3 Dt 4 St 4 Long term decline in commodity prices Supply, shifts caused by technology, efficiency, scale Quantity Source: David Hallam, FAO, presentation at University of Cassino

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8 Real Prices: Bulk Com m odities ( ) Wheat Rice Maize Soybeans Source: Adam Prakash, FAO

9 The 2008 Peak levels and the fall From FAO/GVIEWS

10 Oilseeds etc. falling by August 2008 From FAO/Trade and Markets FAO

11 But food followed oil and commodities From Trostle 2008, USDA

12 Explaining the Price Spike World Bank Don Mitchell Ethanol Demand 70% Keith Collins 60% IFPRI Joachim von Braun Asian Demand 60% Purdue Abbot, Hurt and Tyler Decline in the US $ - 66% Chris Gilbert Speculation and investment in futures markets 55% So we have explained 251% of the variance without even running a regression Thank you

13 Explanatory power of stock/use ratio Relationships between cereal stocks ratios and price s Correlation coefficients: P rice w ith global sto ck-to-use ratio : r = Price with global stock-to-use ratio excluding China : r = Price w ith exp orters' sto ck-to-dis appearance ratio: r = / /91991/921992/931993/941994/951995/961996/971997/981998/991999/002000/012001/02002/032003/042004/052005/062006/07 Global stock-to-use ratio Global stock-to-use ratio exc China Stock-to-disappearance ratio for major exporters FAO Cereals Price Index

14 Causes of the Price Spike 1) Low Stocks but they are a residual, not a cause Stock to Use Ratio, %, All Grains & Oilseeds Years %

15 Causes of the Price Spike 2) Policies to Increase Demand, Reduce Supply and hence Stocks Since the 1990s the EU and USA has had policies such as set aside and decoupling Whole idea was to get rid of excessive and expensive stocks Add Ethanol and Biodiesel Demand One third of the US maize crop and substantial amounts of rape seed So the lack of stocks is a policy determined outcome See Don Mitchell

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17 Causes of the Price Spike 3) Harvest Failures Increasing volatility of the weather probably due to climate change Long drought in Australia Floods in the EU and the USA Further supply reductions Act of God and/or the polluters?

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19 Causes of the Price Spike 4) Non-food Commodity Markets Real demand & speculation Spot and futures prices for metals, iron ore, building materials and oil rose sooner and faster than food prices China and India have reached the point in the structural transformation when numbers in agriculture fall and urbanisation means huge building booms With weak stock and housing markets commodities are attractive to speculators Plus long term investors such as pension funds, which is new on this scale Chris Gilbert Currency speculation? Especially against the US $?

20 Causes of the Price Spike 5) Spot and Futures Markets for Food With weak stock and property markets speculators and investors are attracted Hard to lose betting on price rises when nobody has stocks to destroy your position It is a speculative bubble for most crops Rice is a panic little change in production or consumption but panic buying at high prices but a thin market only 5% or about 35 mt traded Inward looking policies like export bans complete the picture

21 Causes of the Price Spike 6) Trade restraints in reaction to price rises Rice is different almost no changes a panic

22 Causes of the Price spike 7) Decline in the Value of the US $ Food items and oil priced in US $, so both rise as the $ declines US is major exporter and cheap $ means importers can buy more which also pushes prices up But the $ has dropped only about 20% relative to the Euro and much less relative to Asian currencies Not large or general enough to have doubled food prices since 2005 a minor contributor But Purdue disagree following Schuh and Rausser

23 Crude Oil Price Indices in Various Currencies, * Source: International Monetary Fund, International Financial Statistics. and Economic Research Service, USDA* Crude oil prices are normalised to equal 1.0, on average, for Abbot, Hurt and Tyler say 66% of the spike is due to the decline in the US$

24 Is the Price Spike history? Prices are expected to remain about 40% above 2005 levels Markets overshoot and settle back to equilibrium but how much higher than before? Better harvests, some supply response, less destructive bio-fuel initiatives. Export bans etc. will end as stability improves But it is expensive and difficult to rebuild stocks when prices are high. Odd situation in which the WTO says governments should not hold stocks but the private sector has not stepped in sufficiently

25 Long run changes that will persist Not the causes of the bubble but these will set the future level and direction of prices Will food prices continue falling? Will supply grow faster than demand? What about energy demand? Supply side factors Then Demand

26 Supply Side Factors 1) Fertiliser and Fuel Prices This has not registered fully. The 1974 US food price spike was above 1945 prices The link between oil and food then was just supply side - input prices. Fertiliser prices have risen more than food prices (capacity?) so yields will fall not rise where does more output come from? The technology is based on cheap nitrogen Gone for good - how will LDCs manage? Energy efficient, yield increasing technologies?

27 Fertiliser Prices will hit next year s crop

28 Supply Side Factors 2) Lack of Investment in Agriculture Public R&D expenditures for the high income countries fell from 10,534m in constant 2000 international $ in 1991 to10,191m in Also fallen for SSA This small fall is minor, but R&D was also retargeted, away from productivity and towards public interest issues such as the environment, animal welfare and food safety Investment on farms has been hit but R&D is the big issue The private sector has not taken up the slack Productivity growth has fallen in most countries and practically ceased in others like the UK

29 Growth rates in public agricultural research expenditures, IFPRI, 2008

30 Supply Side Factors 3) Climate Change Increasing volatility Poorest and most vulnerable countries hit hardest?

31 Demand Side Factors 1) Population and Income Growth (in Asia) Gradual income growth can t cause a sudden spike. Both India and China were small net exporters for most food except China imported 35 mt of soybeans In the long run more meat and animal products Dairy and white meat takes 3 times as much land as cereals and red meat 7 times But meat prices had not risen much and dairy prices had fallen will rise with more expensive feed The causality is much more indirectly from demand for building materials and oil and raising those prices has an impact on food prices.

32 Energy Consumption (kt of oil equivalent) Energy use China India Years

33 Demand Side Factors 2) Ethanol and Biodiesel Demand This is the fundamental change in the markets Ethanol in the US was driven by subsidies Now it will be hard to stop unless it is banned Chris Hurt at Purdue says that a bushel of corn sells for.05 times the oil price (1 tonne = 2 x oil price) With oil at $140 corn hit $7 and they think $200 oil would mean $10 corn the ceiling price Corn, soybeans and wheat compete for land so those prices move with corn the floor price Corn is also the main feed so dairy, chickens and meat are also linked. Just rice and sugar not linked. Thus, ethanol demand puts a floor under food prices Biodiesel extends it to oilseeds leaves sugar & rice If true the long fall in the relative price of food is over?

34 Predictions If FAO are right the corn price per tonne should settle at about $ US $ If Purdue is right, say the oil price settles at $90 then the corn price will not go below $180 But the perfectly elastic energy demand may not kick in if oil price stays below $60 The fertiliser price is likely to hold food prices up for the next season

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36 Report will be on DIUS website