2007–2008 world food price crisis

The initial causes of the late-2006 price spikes included droughts in grain-producing nations and rising oil prices. Oil price increases also caused general escalations in the costs of fertilizers, food transportation, and industrial agriculture. Root causes may be the increasing use of biofuels in developed countries (see also food vs fuel), and an increasing demand for a more varied diet across the expanding middle-class populations of Asia. The FAO also raised concerns about the role of hedge funds speculating on prices leading to major shifts in prices. These factors, coupled with falling world-food stockpiles, all contributed to the worldwide rise in food prices.

Drastic price increases and possible causes

Between 2006 and 2008 average world prices for rice rose by 217%, wheat by 136%, corn by 125% and soybeans by 107%. In late April 2008 rice prices hit 24 cents (US) per US pound, more than doubling the price in just seven months.

World population growth

Although some commentators have argued that this food crisis stems from unprecedented global population growth, others point out that world population growth rates have dropped dramatically since the 1980s, and grain availability has continued to outpace population.

To prevent price growth, food production should outpace population growth, which was about 1.2% per year. But there was a temporary drop in food production growth: for example, wheat production during 2006 and 2007 was 4% lower than that in 2004 and 2005.

World population has grown from 1.6 billion in 1900 to over 7.5 billion today.

Increased demand for more resource intensive food

The head of the International Food Policy Research Institute, stated in 2008 that the gradual change in diet among newly prosperous populations is the most important factor underpinning the rise in global food prices. Where food consumption has increased, it has largely been in processed ("value added") foods, sold in developing and developed nations. Total grain utilization growth since 2006 (up three percent, over the 2000–2006 per annum average of two percent) has been greatest in non-food usage, especially in feed and biofuels.

One kilogram of beef requires seven kilograms of feed grain. These reports, therefore, conclude that usage in industrial, feed, and input intensive foods, not population growth among poor consumers of simple grains, has contributed to the price increases. Rising meat consumption due to changes in lifestyle can in turn lead to higher energy consumption due to the higher energy-intensity of meat products, for example, one kilogram of meat uses about 19 times as much energy to produce it as the same amount of apple.

Although, the vast majority of the population in Asia remains rural and poor, the growth of the middle class in the region has been dramatic. For comparison, in 1990, the middle class grew by 9.7 percent in India and 8.6 percent in China, but by 2007 the growth rate was nearly 30 percent and 70 percent respectively. The corresponding increase in Asian affluence also brought with it a change in lifestyle and eating habits, particularly a demand for greater variety, leading to increased competition with western nations for already strained agricultural resources. This demand exacerbates dramatic increases in commodity prices such as oil.

Another issue with rising affluence in India and China was reducing the "shock absorber" of poor people who are forced to reduce their resource consumption when food prices rise. This reduced price elasticity and caused a sharp rise in food prices during some shortages. In the media, China is often mentioned as one of the main reasons for the increase in world food prices. However, China has to a large extent been able to meet its own demand for food, and even exports its surpluses in the world market.

Effects of petroleum and fertilizer price increases

Starting in 2007, the prices of fertilizers of all kinds increased dramatically, peaking around the summer of 2008 (see graphs by the International Fertilizer Industry Association). Prices approximately tripled for ammonia, urea, diammonium phosphate, muriate of potash (KCl -potassium chloride), and sulfuric acid (used for making phosphate fertilizer), and then fell just as dramatically in the latter part of 2008. Some prices doubled within the six months before April 2008. Part of the cause for these price rises was the rise in the price of oil, since most fertilizers require petroleum or natural gas to manufacture. Although the main fossil fuel input for fertilizer comes from natural gas to generate hydrogen for the Haber–Bosch process (see: Ammonia production), natural gas has its own supply problems similar to those for oil. Because natural gas can substitute for petroleum in some uses (for example, natural gas liquids and electricity generation), increasing prices for petroleum lead to increasing prices for natural gas, and thus for fertilizer.

Costs for fertilizer raw materials other than oil, such as potash, have been increasing as increased production of staples increases demand. This is causing a boom (with associated volatility) in agriculture stocks.

The major IFPRI ( International Food Policy Research Institute) Report launched in February 2011 stated that the causes of the 2008 global food crisis were similar to that of the 1972–1974 food crisis, in that the 1970s energy crisis was the major driver, as well as the shock to cereal demand (from biofuels this time), low interest rates, devaluation of the dollar, declining stocks, and some adverse weather conditions. Unfortunately the IFPRI states that such shocks are likely to recur with several shocks in the future; compounded by a long history of neglecting agricultural investments.

Declining world food stockpiles

In the past, nations tended to keep more sizable food stockpiles, but more recently, due to a faster pace of food growth and ease of importation, less emphasis is placed on high stockpiles. For example, in February 2008 wheat stockpiles hit a 60-year low in the United States (see also 2008 global rice crisis). Stocks are often calculated as a residual between production and consumption, but it becomes difficult to discriminate between a de-stocking policy choices of individual countries and a deficit between production and consumption.

Financial speculation

Destabilizing influences, including indiscriminate lending and real estate speculation, led to a crisis in January 2008 and eroded investment in food commodities.

Foreign investment drives productivity improvements, and other gains for farmers.

Commodity index funds

Goldman Sachs' entry into the commodities market via the Goldman Sachs Commodity Index has been implicated by some in the 2007–2008 world food price crisis. In a 2010 article in Harper's magazine, Frederick Kaufman accused Goldman Sachs of profiting while many people went hungry or even starved. He argued that Goldman's large purchases of long-options on wheat futures created a demand shock in the wheat market, which disturbed the normal relationship between supply and demand and price levels. He argues that the result was a 'contango' wheat market on the Chicago Mercantile Exchange, which caused prices of wheat to rise much higher than normal, defeating the purpose of the exchanges (price stabilization) in the first place. however, a report by the Organisation for Economic Co-operation and Development – using data from the Commodity Futures Trading Commission – showed tracking funds (of which Goldman Sachs Commodity Index was one) did not cause the bubble. For example, the report points out that even commodities without futures markets also saw price rises during the period. Some commodities without futures markets saw their prices rise as a consequence of the rising prices of commodities with futures markets: the World Development Movement (WDM, now Global Justice Now) stated there was strong evidence that the rising price of wheat caused the price of rice to subsequently rise as well.

Effects of trade liberalization

Some theorists, such as Martin Khor of the Third World Network, point out that many developing nations have gone from being food independent to being net food importing economies since the 1970s and 1980s International Monetary Fund (and later the World Trade Organization's Agreement on Agriculture) free market economics directives to debtor nations. In opening developing countries to developed world food imports subsidised by Western governments, developing nations can become more dependent upon food imports if local agriculture does not improve.

While developed countries pressured the developing world to abolish subsidies in the interest of trade liberalization, rich countries largely kept subsidies in place for their own farmers. United States government subsidies for 2008 pushed production toward biofuel rather than food.

Effects of food for fuel

One systemic cause for the price rise is held to be the diversion of food crops (maize in particular) for making first-generation biofuels. An estimated 100 million tons of grain per year are being redirected from food to fuel. (Total worldwide grain production for 2007 was just over 2000 million tons.) As farmers devoted larger parts of their crops to fuel production than in previous years, land and resources available for food production were reduced correspondingly.

This has resulted in less food available for human consumption, especially in developing and least developed countries, where a family's daily allowances for food purchases are extremely limited. The crisis can be seen, in a sense, to dichotomize rich and poor nations, since, for example, filling a tank of an average car with biofuel, amounts to as much maize (Africa's principal food staple) as an African person consumes in an entire year.

Brazil, the world's second largest producer of ethanol after the US, is considered to have the world's first sustainable biofuels economy and its government claims Brazil's sugar cane based ethanol industry has not contributed to the 2008 food crises. A World Bank policy research working paper released in July 2008 concluded that "...large increases in biofuels production in the United States and Europe are the main reason behind the steep rise in global food prices", and also stated that "Brazil's sugar-based ethanol did not push food prices appreciably higher". An economic assessment published in July 2008 by the OECD disagrees with the World Bank report regarding the negative effects of subsidies and trade restrictions, finding that the effect of biofuels on food prices are much smaller.

A report released by Oxfam ( Oxford Committee for Famine Relief)in June 2008 criticized biofuel policies of rich countries and concluded that, of all biofuels available in the market, Brazilian sugarcane ethanol is "far from perfect" but it is the most favorable biofuel in the world in term of cost and GHG balance. The report discusses some existing problems and potential risks and asks the Brazilian government for caution to avoid jeopardizing its environmental and social sustainability. The report also says that: "Rich countries spent up to $15 billion last year supporting biofuels while blocking cheaper Brazilian ethanol, which is far less damaging for global food security." (See Ethanol fuel in Brazil)

German Chancellor Angela Merkel said the rise in food prices is due to poor agricultural policies and changing eating habits in developing nations, not biofuels as some critics claim. On 29 April 2008, US President George W. Bush declared during a press conference that "85 percent of the world's food prices are caused by weather, increased demand and energy prices", and recognized that "15 percent has been caused by ethanol". On 4 July 2008, The Guardian reported that a leaked World Bank report estimated the rise in food prices caused by biofuels to be 75%. This report was officially released in July 2008.

Since reaching record high prices in June 2008, corn prices fell 50% by October 2008, declining sharply together with other commodities, including oil. As ethanol production from corn has continued at the same levels, some have argued this trend shows the belief that the increased demand for corn to produce ethanol was mistaken. "Analysts, including some in the ethanol sector, say ethanol demand adds about 75 cents to $1.00 per bushel to the price of corn, as a rule of thumb. Other analysts say it adds around 20 percent, or just under 80 cents per bushel at current prices. Those estimates hint that $4 per bushel corn might be priced at only $3 without demand for ethanol fuel." These industry sources consider that a speculative bubble in the commodity markets holding positions in corn futures was the main driver behind the observed hike in corn prices affecting food supply.

Second- and third-generation biofuels (such as cellulosic ethanol and algae fuel, respectively) may someday ease the competition with food crops, as can grow on marginal lands unsuited for food crops, but these advanced biofuels require further development of farming practices and refining technology; in contrast, ethanol from maize uses mature technology and the maize crop can be shifted between food and fuel use quickly.

Biofuel subsidies in the US and the EU

The World Bank lists the effect of biofuels as an important contributor to higher food prices. The FAO/ECMB has reported that world land usage for agriculture has declined since the 1980s, and subsidies outside the United States and EU have dropped since the year 2004, leaving supply, while sufficient to meet 2004 needs, vulnerable when the United States began converting agricultural commodities to biofuels. According to the United States Department of Agriculture (USDA), global wheat imports and stocks have decreased, domestic consumption has stagnated, and world wheat production has decreased from 2006 to 2008.

In the United States, government subsidies for ethanol production have prompted many farmers to switch to production for biofuel. Maize is the primary crop used for the production of ethanol, with the United States being the biggest producer of maize ethanol. As a result, 23 percent of United States maize crops were being used for ethanol in 2006–2007 (up from 6 percent in 2005–2006), and the USDA expects the United States to use 81 million tons of maize for ethanol production in the 2007–2008 season, up 37 percent. This not only diverts grains from food, but it diverts agricultural land from food production.

Nevertheless, supporters of ethanol claim that using corn for ethanol is not responsible for the worst food riots in the world, many of which have been caused by the price of rice and oil, which are not affected by biofuel use but rather by supply and demand.

However, a World Bank policy research working paper released in July 2008 says that biofuels have raised food prices between 70 and 75 percent. The study found that higher oil prices and a weak dollar explain 25–30% of total price rise. The "month-by-month" five-year analysis disputes that increases in global grain consumption and droughts were responsible for price increases, reporting that this had had only a marginal effect and instead argues that the EU and US drive for biofuels has had by far the biggest effect on food supply and prices. The paper concludes that increased production of biofuels in the US and EU were supported by subsidies and tariffs on imports, and considers that without these policies, price increases would have been smaller. This research also concluded that Brazil's sugar cane based ethanol has not raised sugar prices significantly, and suggest to remove tariffs on ethanol imports by both the US and EU, to allow more efficient producers such as Brazil and other developing countries to produce ethanol profitably for export to meet the mandates in the EU and the US.

The Renewable Fuel Association (RFA) published a rebuttal based on the version leaked before the formal release of the World Bank's paper. The RFA critique considers that the analysis is highly subjective and that the author "estimates the effect of global food prices from the weak dollar and the direct and indirect effect of high petroleum prices and attributes everything else to biofuels".

An economic assessment report also published in July 2008 by the OECD agrees with the World Bank report regarding the negative effects of subsidies and trade restrictions, but found that the effect of biofuels on food prices are much smaller. The OECD study is also critical of the limited reduction of GHG emissions achieved from biofuels produced in Europe and North America, concluding that the current biofuel support policies would reduce greenhouse gas emissions from transport fuel by no more than 0.8 percent by 2015, while Brazilian ethanol from sugar cane reduces greenhouse gas emissions by at least 80 percent compared to fossil fuels. The assessment calls on governments for more open markets in biofuels and feedstocks to improve efficiency and lower costs.

Idled farmland

According to the New York Times on 9 April 2008, the United States government pays farmers to idle their cropland under a conservation program. This policy reached a peak of 36,800,000 acres (149,000 km²) idled in 2007, that is 8% of cropland in United States, representing a total area bigger than the state of New York.

Agricultural subsidies

The global food crisis has renewed calls for removal of distorting agricultural subsidies in developed countries. Support to farmers in OECD countries totals US$280 billion annually, which compares to official development assistance of just US$80 billion in 2004, and farm support depresses global food prices, according to OECD estimates. These agricultural subsidies lead to underdevelopment in rural developing countries, including the least developed countries; meanwhile subsidised food increases overconsumption in developed countries. The US Farm Bill brought in by the Bush Administration in 2002 increased agricultural subsidies by 80% and cost the US taxpayer US$190 billion. In 2003, the EU agreed to extend the Common Agricultural Policy until 2013. Former UNDP Administrator Malloch Brown renewed calls for reform of the farm subsidies such as the CAP.

Distorted global rice market

Japan is forced to import more than 767,000 tons of rice annually from the United States, Thailand, and other countries due to WTO rules. Japan is not allowed to re-export this rice to other countries without approval. This rice is generally left to rot and then used for animal feed. Under pressure, the United States and Japan are poised to strike a deal to remove such restrictions. It is expected 1.5 million tons of high-grade American rice will enter the market soon.

Crop shortfalls from natural disasters

Several distinct weather- and climate-related incidents have caused disruptions in crop production. Perhaps the most influential is the extended drought in Australia, in particular the fertile Murray-Darling Basin, which produces large amounts of wheat and rice. The drought has caused the annual rice harvest to fall by as much as 98% from pre-drought levels.

Australia is historically the second-largest exporter of wheat after the United States, producing up to 25 million tons in a good year, the vast majority for export. However, the 2006 harvest was 9.8 million. Other events that have negatively affected the price of food include the 2006 heat wave in California's San Joaquin Valley, which killed large numbers of farm animals, and unseasonable 2008 rains in Kerala, India, which destroyed swathes of grain. These incidents are consistent with the effects of climate change.

The effects of Cyclone Nargis on Burma in May 2008 caused a spike in the price of rice. Burma has historically been a rice exporter, though yields have fallen as government price controls have reduced incentives for farmers. The storm surge inundated rice paddies up to 30 miles (48 km) inland in the Irrawaddy Delta, raising concern that the salt could make the fields infertile. The FAO had previously estimated that Burma would export up to 600,000 tons of rice in 2008, but concerns were raised in the cyclone's aftermath that Burma may be forced to import rice for the first time, putting further upward pressure on global rice prices.

Stem rust reappeared in 1998 in Uganda (and possibly earlier in Kenya) with the particularly virulent UG99 fungus. Unlike other rusts, which only partially affect crop yields, UG99 can bring 100% crop loss. Up to 80% yield losses were recently recorded in Kenya.

As of 2005 stem rust was still believed to be "largely under control worldwide except in Eastern Africa". But by January 2007 an even more virulent strain had gone across the Red Sea into Yemen. FAO first reported on 5 March 2008 that Ug99 had now spread to major wheat-growing areas in Iran.

These countries in North Africa and Middle East consume over 150% of their own wheat production; the failure of this staple crop thus adds a major burden on them. The disease is now expected to spread over China and the Far-East. The strong international collaboration network of research and development that spread disease-resistant strains some 40 years ago and started the Green Revolution, known as CGIAR, was since slowly starved of research funds because of its own success and is now too atrophied to swiftly react to the new threat.

Soil and productivity losses

Sundquist points out that large areas of croplands are lost year after year, due mainly to soil erosion, water depletion and urbanisation. According to him "60,000 km²/year of land becomes so severely degraded that it loses its productive capacity and becomes wasteland", and even more are affected to a lesser extent, adding to the crop supply problem.

Additionally, agricultural production is also lost due to water depletion. Northern China in particular has depleted much of its non-renewables aquifers, which now impacts negatively its crop production.

Urbanisation is another, smaller, difficult to estimate cause of annual cropland reduction.

Rising levels of ozone

One possible environmental factor in the food price crisis is rising background levels of ground-level tropospheric ozone in the atmosphere. Plants have been shown to have a high sensitivity to ozone levels, and lower yields of important food crops, such as wheat and soybeans, may have been a result of elevated ozone levels. Ozone levels in the Yangtze Delta were studied for their effect on oilseed rape, a member of the cabbage family that produces one-third of the vegetable oil used in China. Plants grown in chambers that controlled ozone levels exhibited a 10–20 percent reduction in size and weight (biomass) when exposed to elevated ozone levels. Production of seeds and oil was also reduced. The Chinese authors of this study also reported that rice grown in chambers that controlled ozone levels exhibited a 14 to 20 percent reduction in biomass yield when exposed to ozone levels over 25 times higher than was normal for the region.