Elsevier

Food Policy

Volume 36, Issue 2, April 2011, Pages 136-146
Food Policy

Rethinking the global food crisis: The role of trade shocks

https://doi.org/10.1016/j.foodpol.2010.10.003Get rights and content

Abstract

Although fundamental factors were clearly responsible for shifting the world to a higher food price equilibrium in the years leading up the 2008 food crisis, there is little doubt that when food prices peaked in June of 2008, they soared well above the new equilibrium price. Numerous arguments have been proposed to explain overshooting, including financial speculation, depreciation of the United States (US) dollar, low interest rates, and reductions in grain stocks. However, observations that international rice prices surged in response to export restrictions by India and Vietnam suggested that trade-related factors could be an important basis for overshooting, especially given the very tangible link between export volumes and export prices. In this paper, we revisit the trade story by closely examining monthly data from Thailand (the largest exporter of rice), and the United States (the largest exporter of wheat and maize and the third largest exporter of soybeans). In all cases except soybeans, we find that large surges in export volumes preceded the price surges. The presence of these large demand surges, together with back-of-the-envelope estimates of their price impacts, suggests that trade events played a much larger and more pervasive role than previously thought.

Research highlights

► US and Thai monthly export data used to re-examine causes of global food crisis. ► Export restrictions and demand surges explain nearly all of surge in rice prices. ► Droughts, export restrictions and demand surges a major factor in wheat markets. ► Trade shocks even a major factor for maize, and soybean prices followed maize prices in the future more emphasis should be placed on trade-based policy solutions.

Section snippets

Background

“Since the market events of 1972, most market observers consider exports to be the great uncertainty underlying commodity supply, demand, and price forecasts. In 1972, the Soviet Union made unexpected purchases of large amounts of U.S. grain. Prices for corn, wheat, and soybeans climbed to record-levels in 1973, then to still higher levels in 1974. Congress responded by mandating export sales reporting by USDA beginning in 1973.” From Randy Schnepf’s (2006) Congressional Research Services

A short note on methods

As we noted above, most of the prior studies on the crisis lack formal analyses such as simulation models or time-series econometric analyses. In fact, the very nature of the crisis revealed the limitations of existing methods. In the case of simulation models, organizations such as the Food and Agricultural Organization, OECD, USDA, and IFPRI all have global simulation models that predict (among other things) the effects of various economic trends and policy actions on food prices. However,

Rice markets

With an analysis of rice-market events, we intentionally begin at the end of the crisis rather than the beginning. As shown in Fig. 1, rice prices started to rise in early 2007 (much later than maize prices and just after the first rise in wheat prices), and then surged dramatically beginning in December 2007. Rice is distinctive in that it is thinly traded; only around 25 million metric tons (mmt) have typically been traded in recent years, or about 7% of global production. Rice is also

Wheat markets

In this section, we continue to work our way backwards by investigating events in the wheat markets, which, as we observed above, seem to have precipitated the rush on the rice markets. As with rice, we concentrate on the largest wheat export market, the US market, which plays a significant benchmarking role in determining prices elsewhere.

There are two good reasons why trade events could have been extremely important in determining US wheat prices. First, exports accounted for around half of

Maize markets

Despite the importance of trade events in rice and wheat markets, there has been virtually no discussion of trade events being an important factor in maize markets. This omission is understandable in light of some important facts regarding the global maize market. First, the United States heavily dominates the global maize trade, accounting for around 60% of world exports, so trade restrictions elsewhere have less scope to influence international price. Second, maize is used as livestock feed

Soybean markets

In this section we will argue that the increase in soybean prices was almost entirely driven by maize-market events and maize-price movements. Fig. 1 in ‘Background’ demonstrated that soybean prices tracked maize prices very closely from 2003 onwards (more closely than any other pair of series), and typically with a small lag.

Conclusions

In most of the research and media reports on the food crisis, there has been very little emphasis on the kind of short run trade shocks identified in this study. Instead, the vast majority of the attention has focused on biofuels, oil prices, changing Asian diets, declining grain stocks, and financial speculation. Yet the analysis herein suggests that trade events were pervasively important in all of the major grain markets (with knock-on effects on soybeans) and arguably provide the most

Acknowledgements

The author would like to very sincerely thank Paul Dorosh, David Orden, Shenggen Fan, Phil Abbott, Ashok Gulati, Xiaobo Zhang and three anonymous reviewers for their excellent comments and advice. Special thanks go to John Ulimwengu for helping with some econometric estimates. The usual disclaimer applies.

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