Food

Fluctuating Food Prices: Causes, Challenges and Oppportunities

Timothy O Williams, Adviser and Head, Enterprise and Agriculture Section, Special Advisory Service Division, Commonwealth Secretariat

World market prices for major staple food commodities such as cereals and vegetable oils reached their highest level in nearly 30 years in the first half of 2008. Since then prices have fallen swiftly and significantly. This fluctuation raises questions for Commonwealth governments about what the future holds and how best to respond in order to assure food security and promote long-term agricultural growth. This article identifies the underlying and proximate factors that have contributed to food price fluctuations, discussing the challenges and opportunities that must be addressed to prevent future food crisis and lay the foundation for long-term sustainable agricultural growth.

For nearly three decades between 1976 and 2005, the price of food was a non-story. World market prices for food commodities were relatively low and stable. But this has changed. Escalating food prices that started in 2006 and that reached a peak in the first half of 2008 grabbed global headlines and caused a major food crisis that impacted negatively on the food security of poor households in Commonwealth countries. A combination of structural changes in global food supply and demand that began more than a decade ago and short-run cyclical factors led to the surge in food prices.

However, in the second half of 2008, prices of major cereals began to fall – partly as a result of favourable weather conditions, which improved supply outlook, and partly due to the financial crisis and the ensuing economic downturn, which weakened demand.

Despite the actions taken by governments and the international development community to address several aspects of the food crisis and the decline already witnessed in international cereal prices, food security is still in jeopardy. The latest estimates from the Food and Agriculture Organization (FAO) indicate that 36 countries around the world, eight of which are in the Commonwealth, are in need of external assistance. This situation raises questions about whether the right actions are being pursued, and how best to respond to the challenges and opportunities posed by fluctuating food prices.

Putting price fluctuations in perspective

Factors driving price fluctuations

The price of nearly every agricultural commodity rose to a historic high over the past two years. Between January 2006 and June 2008, world market prices for wheat, maize and rice – the staples that account for much of the world food consumption of grains – more than doubled.

Meat and dairy products, vegetable oils and cassava also experienced sharp hikes, with prices of butter and milk almost doubling.

The rapid escalation in food prices did not occur overnight. On the demand side, strong global growth in average incomes and rising population particularly in developing countries increased food and feed consumption. Consumers not only increased per capita consumption of staple foods but also diversified their diets to include more meats and dairy products and this, in turn, fuelled a demand for grains and oil seeds used as feed.

On the supply side, agricultural production growth slowed down between 1995 and 2003. Stable food prices experienced over the preceding 20 years and abundant global supplies reduced incentives for maintaining food stocks and for funding agricultural research and development to increase yields.

Reduced global stocks of basic staples like maize, wheat, rice and soybeans began to emerge in 2000 as a result of long-term growth in worldwide demand and slowdown in world food production.

The decline in stocks, in turn, acted to exacerbate price impacts when new sources of demand (for example, an increase in biofuel production in the USA and the European Union starting around 2003 and 2005, respectively), along with weather and crop disease shocks in 2006 and 2007, hit food commodity markets. Other factors that contributed to the historic peak in food prices include: 

• the general depreciation of the US dollar and the high energy prices that prevailed up to the second quarter of 2008, and 
• policy responses to domestic food price inflation by a number of
  countries.

Many of the factors that drove up food prices both on the demand and supply side equally apply to fisheries, an important sub-sector in many regions of the Commonwealth. Demand for fish and seafood is rising sharply largely due to increasing affluence. The FAO estimates that an additional 40 million tonnes of aquatic food per year will be needed by 2030, but notes that catches of wild fish have remained roughly stable since the mid-1980s at around 90 million tonnes a year and predicts that this figure is unlikely to rise substantially.

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