World Food System Disruptions in the Early 2000s: Causes, Impacts, and Cures

• Published date: 01 March 2014
• Author: Matthias Kalkuhl,Bernardina Algieri,Joachim Braun
• Date: 01 March 2014
• DOI: http://doi.org/10.18278/wfp.1.1.3

World Food Policy

34

Introduction

The spikes in food prices over the last

six years and their extreme volatility,

i.e., unpredictable and large swings in

prices, are an expression of changes in glob-

al markets and a signal of resource scarcity.

Briey interrupted only in the mid-1970s,

international real food prices recorded a de-

clining trend that lasted for decades. Prices

then stabilized around a slightly increasing

trend for ve to six years until mid-2007,

when they started a sharp rise, reaching a

twin peak rst in June/July 2008 and then

in December 2010/January 2011. Since

then, international real prices have been

volatile, with several peaks and troughs.

e breaking of the long-term price

decline experienced since 2008 and the ex-

treme volatility of food prices present ma-

jor challenges for the world’s policymakers,

who are increasingly faced with rising food

insecurity, combined with political and eco-

nomic risks, like social unrests, and acceler-

ated ination. Lack of predictability and un-

certainty associated with increased volatility

hampers economic growth in poor countries

(Jacks, O'Rourke, and Williamson 2011),

undermines progress in nutritional status

and peoples’ food security (FAO 2011), and

amplies the incidence of poverty, when the

real income of the poor declines (Benson

et al. 2013; Ivanic and Martin 2008). Fur-

thermore, price volatility may complicate

environmental management for commodi-

ty-dependent countries and nancial plan-

ning, since companies tend to postpone

investment expenditures when they expe-

rience increased uncertainty concerning

future commodity prices (Ferderer 1997).

e rapidly rising and more-volatile food prices of recent years are a signicant in-

dication of changes in global markets and a signal of resource scarcity. ey pose

new challenges in terms of food and nutrition security at the worldwide level. is

article traces the main drivers and impacts of food price increases, and propos-

es institutional changes in the world food system to help overcome chronic sup-

ply constraints through enhanced productivity, combined with actions to address

new causes of food price volatility, such as nancialization of commodity markets

and linkages to energy markets. e price crises of 2008 and 2011, and to a less-

er extent in 2012, have been met with oen, uncoordinated national policy adjust-

ments with international implications. To prevent such collective actions failures in

the international food system, comprehensive institutional changes are proposed.

Keywords: price volatility, price crises, food security, governance

JEL Classication: F55, O19, Q02, Q18

World Food System Disruptions in the Early 2000s:

Causes, Impacts, and Cures

Joachim von Braun1 , Bernardina Algieri2 , Matthias Kalkuhl3

1 Corresponding author, Professor for Economic and Technological Change, Director, Center for Develop-

ment Research, University of Bonn, Germany. www.zef.de.

2 Lecturer, University of Calabria, Italy.

3 Senior Researcher, Center for Development Research, University of Bonn, Germany.

35

World Food System Disruptions in the Early 2000s: Causes, Impacts, and Cures

In this context, the present study

aims to examine in greater detail the caus-

es of sustained increases in agricultural

prices and price volatility in order to as-

sess the emerging risks for developing

countries and to propose a set of institu-

tional changes in the world food system to

overcome the risks of extreme booms and

busts in food prices. It outlines potential

approaches for coping with chronic supply

constraints through enhanced productiv-

ity and suggests actions connected to the

new drivers of food crises, linked to nan-

cial markets, energy, water, and climate

change. Eective remedies will require a

combination of new public-policy actions

that foster agricultural growth and protect

the vulnerable. Finally, the paper reviews

several promising international initiatives

carried out recently by the private sector to

stabilize prices. e remainder of the paper

is organized as follows: the second section

investigates the main determinants of high

and volatile food prices, and groups them

into three main categories: fundamentals,

macro-factors, and new drivers; the third

section analyses the core consequences

brought about by high prices and volatility;

and the fourth section presents a set of pol-

icy actions to be pursued in order to curb

extreme price rises and volatility, and mit-

igate the negative eects on the most vul-

nerable.

An overview of the main causes of

price hikes and volatility

Aer remaining at historically low

levels for decades, food prices

started rising and becoming more

volatile in the mid-2000s. In 2007–2008,

the price of almost every food item sharp-

ly increased. At their peaks in the second

quarter of 2008, world prices of wheat and

maize were three times higher than at the

beginning of 2003, and the price of rice was

ve times higher (Figure 1). Prices dropped

thereaer, mainly b ecause food demand

slowed with the global nancial crisis and

recession; they spiked again in 2011 and in

the third quarter of 2012.

At a more aggregated level and in

real terms, the Food and Agriculture Orga-

nization’s (FAO) food-price index, tracking

important international food commodity

prices, as well as the FAO’s cereals price

index which includes grains and rice repli-

cate the price movements of the four staple

crops (Figure 2). Although the FAO indi-

ces use weights based on export volumes

which do not mirror the diet composition

of the poor in developing countries, they

give a rst proxy of the magnitude of food

price changes.

e fact that agricultural commod-

ities, especially cereals, experienced three

signicant price spikes in about six years

suggests that something serious is shaking

the world’s food chain. Determinants of

high prices and volatility are complex and

numerous, and they include traditional

agricultural fundamentals as well as mac-

ro-economic factors. Additionally, they in-

volve new determinants linked to energy

and worldwide nancial markets. Figure 3

provides a synthesis of the dierent drivers

which will be discussed in more detail be-

low.

Market fundamentals that led to

price increases operate via demand and

supply channels, and include greater costs

of production due to higher energ y and fer-

tilizer prices, high demand coming mainly

from emerging markets, primarily China

and India, and general uctuations in har-

vests (Abbott, Hurt, and Tyner 2008; 2011;

Trostle 2008). e inelastic nature of food

demand and supply exacerbates shocks as

production can only respond slowly to in-