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Against the tide: The real causes of the food crisis

Underlying the headlines are distortions in the market that can be overcome by liberalization.

There are several reasons for the food price crisis. Certainly, poor harvests as a result of extreme weather conditions in such places as Australia (where there was an unprecedented drought) provided the initial trigger.

And there is no doubt that a rise in consumption, as a result of growing populations and incomes in many emerging economies, has been a driver of higher food prices. It is equally clear that a persistent drop in agricultural investment has depleted already low food stockpiles.

But the extremes in food prices are increasingly the result of speculation as investors switch from bonds and equities in the credit crunch into relatively small commodity markets.

Calm should eventually return to food markets for several reasons. First, I expect the world economy to head into recession over the next year. That will curb the pace of demand growth for food.

Second, the operation of market forces should begin to boost supplies. Russia and Ukraine – with vast wheat-growing potential – are clearly likely to produce more; so will Thailand, Argentina and a few other key food exporters. Furthermore, the drought affecting Australia will not last forever.

Hungry markets

CRB foodstuff spot price index

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