Causes of the Current Increase in Food Prices
The starting point for a serious discussion of current food price increases mustbe the historical pattern of price changes. Two consistent patterns emerge.First is that food prices are always volatile, because both food supply and fooddemand respond slowly to changes in price. As a result, any disruption in thematch of supply and demand will produce exaggerated changes in price.Figure 1 illustrates the volatility of prices for one crop, rice, over the last 30years, adjusted for inflation.
Figure 1. The Real Price of Rice 1970–2008
1 9 7 0 1 9 7 3 1 9 7 6 1 9 7 9 1 9 8 2 1 9 8 5 1 9 8 8 1 9 9 1 1 9 9 4 1 9 9 7 2 0 0 0 2 0 0 3 2 0 0 6
P r i c e I n d e x ( 1 9 7 0 = 1 0 0 )
Source: UN Food and Agriculture Organization, staff estimatesThe second historical pattern is that the price of food has shown a downwardtrend over the past century, relative to prices of manufactured goods. Figure 2presents a generally accepted food price index for the period 1900–1987developed by World Bank economists, updated with calculations by IMF staff for the period 1957–2006.
While food prices have been rising for the lastseveral years, they are still well below levels that prevailed for most of the lastcentury.Is there reason to think that the current price spikes are harbingers of afundamental shift in trends? On the one hand, rising food demand fromgrowing developing countries, a significant factor in current increases, islikely to persist and this is indeed a positive development, as it indicates thatmore people can afford adequate nutrition. On the other hand, higher priceswill elicit increased production—this can already be observed in this season’splanting data. However other contemporary factors have complicated therelationship between supply and demand.The competition of biofuels for crops and land use has had a modest impacton food prices to date, but the effects will grow unless the United States and