political instability, undermine their resilience to cope and be free from

hunger and insecurity. In fact, those poor households suffering from chronic
food insecurity both in rural and urban areas are more vulnerable to the
fluctuations and volatility of domestic and world food prices as these are the
most important determinants of transitory food insecurity.

TRANSITORY FOOD INSECURITY

The World Bank (1985) defines transitory food insecurity as a ‘temporary

decline in households’ access to enough food’. More precisely, it is a
temporary decline in food consumption below acceptable levels. It results
from: instability in world food prices (which to some extent impact on
domestic prices), instability in food production and lack of food reserves
and/or an inability to import food due to weak foreign exchange or a decline
in household income. In addition there can be other associated factors such as
political and civil unrest and wars. However, famine can be the worst form of
transitory food insecurity.
Transitory food insecurity can be further divided into cyclical and temporary
food insecurity (Canadian International Development Agency (CIDA), in
Maxwell and Frankenberger 1992). Temporary food insecurity can happen for
a limited period of time because of unforeseen and unpredictable
circumstances, while cyclical or seasonal food insecurity is a regular
recurrence of inadequate access to food during the dearth season. This may be
due to logistical difficulties or to the high cost of storing food.
Three variables can influence household’s consumption and to some extent
can predict the vulnerability of households to transitory food insecurity. These
are: (1) world food prices, which influence (2) domestic food prices, and (3)
household purchasing power (World Bank 1985). The question here is: what
causes the instability in world food prices?

Instability in world food prices

The food crisis of 1972–1973
Before discussing the causes of the grain price increases of 2007 and beyond,
it is imperative to look back and contrast the causes of price instability during
the period from 1972 to 1973 with the causes operating since 2007. It will be
important to consider whether the most recent food crisis represents the
beginning of a new trend characterised by more volatile, if not higher,
commodity prices.
Historical data and studies show the extreme volatility of both agricultural
commodity prices and food prices during the 1972–1973 period. Mackie’s
paper (1974) on the ‘international dimension of agricultural prices’ provided
a perspective on commodity prices from the 1950s to 1973, with the largest
increases in the international prices of primary products in 1972 and
agricultural products in 1973 – even larger than during the immediate post-
Second World War period or during the Korean War commodity price boom.
Between 1972 and 1973 the largest increases were for oilseed cake and meal
(140 per cent), wheat (71 per cent), oilseeds (59 per cent), maize (54 per
cent), rice, pork and sugar (35 per cent), wool (129 per cent) and cocoa (87
per cent).
Mackie (1974: 14–15) explores four hypotheses to explain the causes of the
1972 and 1973 world food crisis. The first hypothesis focuses on the rapid
rise in affluence around the world, which provided incentives for greater
growth in demand for food. Watkins (1991: 39–40) confirms that during the
1960s, in both the US and the EU, farm surpluses were absorbed, admittedly
amid growing trade frictions between the two major producers of food in their
attempt to dominate world food markets and capture the expansion of world
agricultural trade.
The most dynamic force behind this trade expansion was the demand for food
imports on the part of developing countries, which grew at double the rate of
demand from Organisation of Economic Cooperation and Development
(OECD) countries. Although acceleration in income growth in industrial
countries was certainly a contributory factor in 1972–1973, especially in
relation to animal feeds and protein meals, the sharp price increases for
agricultural products resulted mainly from supply shortages, which were
associated with both an increase in import requirements and a reduction in
production and export supplies outside the US (Mackie 1974: 14–15).
A second hypothesis is that the world has lost its ability to feed itself and to
increase output relative to demand, because there is limited land and limited
production technology that will continue to hold food supplies below world
demand for many years to come. However, evidence from the available data
shows that food production increases are outstripping the population growth
rate from 1961 to 2005 (FAO 2005a), so one can argue that it is not that the
world has lost its ability to feed itself, but rather that national interests and
government priorities have determined the level of investments (in the form of
subsidies and export support) which are available to increase production. The
two major factors were the US government’s decision to reduce production to
consumption level by setting aside land, and the EU imposition of the same
measures in addition to the introduction of a production levy and a quota
system to curb overproduction of food. These policies played a role in
reducing the level of stocks available for export at a time of unusually large
surges in world food import demand.
Watkins (1991) explained the shift in US farm policy and how policymakers
have grappled with this problem throughout the post-war period. It was
envisaged that new legislation aimed at reforming government payments to
farmers to remove land from cultivation (land set-aside), coupled with tight
controls on imports, would prove sufficient to support farm incomes without
excessive budgetary expenditure. However, these price support mechanisms
failed. Although land set-aside reduced cultivation acreage, farmers were
given incentives to maximise output on their remaining land by increasing the
application of chemicals and other inputs. By the 1960s, structural
overproduction and corporate grain exporting interests, notably the Cargill
Corporation, had forced a shift in policy emphasis away from supply control
and towards aggressive export promotion.
However, the explicit aim of the US Public Law 480, passed in 1954, was ‘to
lay the basis for a permanent expansion of their exports of agricultural
products with lasting benefits to themselves and peoples of other lands’
(ÓGráda 2009: 226). From the late 1960s the US’s domination of world
markets came under challenge from the EU, where high guaranteed price
supports under the Common Agricultural Policy (CAP), allied to
technological advances, promoted huge productivity gains and production
surpluses. Moreover, the success of the Green Revolution (GR) in South East
Asia led some developing countries such as India to become exporters of
food.
A third hypothesis is that the food shortages and high prices of the 1970s were
caused primarily by currency instability and subsequent speculation in
agricultural commodities. Crop shortfalls and high demands for food put
further pressure on total world imports, thereby increasing uncertainty,
hoarding and speculation in food commodities. This speculation was aided by
the international monetary situation and the dramatic increase in oil prices
(Mackie 1974: 18).
The fourth hypothesis maintains that the world food shortages and high prices
were directly related to crop shortfalls. One of the major factors affecting the
price of wheat, for example, has been the level of stocks in the US and
Canada and the fluctuation of supplies in the rest of the world, especially in
countries with strong central planning policies such as the former Soviet
Union and China (Mackie 1974: 18; World Bank 1985). Droughts in India, the
former Soviet Union and China resulted in increased imports by these
countries during widespread shortfalls in production of a number of
agricultural commodities. Moreover, instability in world demand was
reflected in the sharp rise and subsequent fall in per capita income growth in
developed and developing countries (World Bank 1985).
Mackie believed that while all the factors mentioned above played a part in
the 1973 surge in agricultural prices, the most important factor was supply
shortages. He indicated that rapid growth in world import demand for US
commodities was more directly related to shortfalls in production and low
stock levels in the rest of the world than to rapid shifts in demand resulting
from income growth or dollar devaluations. However, he did not discount the
influence of factors other than the short supply of agricultural commodities.
Furthermore, it seems that ‘there was little evidence for attributing price
increases in agricultural commodities during 1972 to speculative activity
associated with the currency realignments in December 1971.

The food crisis since 2007

From this period the issue of rising global food prices moved to the forefront
of international media attention and national and international political
agendas. Since 2007 tens of millions more of the chronically food insecure
were pushed into hunger and further poverty as a result of yet another sharp
increase in food prices. Civil unrest was reported in locations all over the
world. Developing countries, especially food importing countries, used
various measures at national level to halt the crisis such as imposing export
restrictions on food and using subsidies and price controls.
Households, faced with this crisis, were forced to find ways to cope. Coping
mechanisms involved undesirable but often unavoidable compromises, such
as replacing more-nutritious food with less-nutritious food, selling productive
assets, withdrawing children from school, forgoing health care or education,
or simply eating less (FAO 2009a: 4). The questions then are: what was the
trigger for this latest crisis? How different was it from the crisis of 1972–
1973? And what is the long-term outlook for food commodity markets?
The recent rise in food prices began around the year 2002, when global grain
stocks began to decline steeply from 110 days’ worth of food before the turn
of the century to just over 60 days’ worth just half a decade later in 2004
(Trostle, in Evans 2009: 12). From the outset this crisis was triggered by the
same factors that caused the crisis in 1972 and 1973, with one exception – the
use of food crops as biofuel, a factor that was constant for seven of the eight
years since 2000 (ibid). The following are some of the key factors behind the
recent boom, or the latest ‘perfect storm’.
One major factor is that of sustained economic growth, especially in emerging
economies (notably India and China), leading to a shift towards a more grain-
intensive Western diet rich in meat and dairy products. Although this is an
important factor, with a combined population of over 2.4 billion in both India
and China there is no doubt that positive per capita economic growth in those
countries will have its impact on global demand for food. However, the effect
of changing dietary patterns in emerging economies may have been
overestimated (FAO 2008; IFPRI 2008; Baffes 2009; Evans 2009). Goldman
Sachs also show that while historical growth in global demand for food crops
has been around 1.5 per cent a year, the figure is now 2 per cent and likely to
rise to 2.6 per cent within a decade taking into account population growth
rates (Currie 2007).
Recent analysis suggests that the policies which encouraged production of
biofuels, such as support and subsidies, have been the single most significant
driver of higher prices (Baffes 2009; Evans 2009).
In 2002 the US dollar began to depreciate, and as it devalued the price of oil
increased – a trend that accelerated from 2004 onwards. High oil prices add
directly to the costs of growing, harvesting and distributing farm produce, by
increasing the costs of agricultural inputs such as fertilisers and
transportation. The rising price of oil, and the role of speculators in
maximising fear that the world is running out of extractive resources
(especially crude oil), also helped to increase the attractiveness of biofuels as
a substitute for oil in the US, the EU, Brazil and elsewhere (Evans 2009: 12).
Several studies have claimed that grain prices have been drastically inflated
by manipulative financial speculation. The fear is that such trading has
undermined the price-smoothing capacity of agricultural future markets, and
increased the price risks encountered by consumers, producers and
governments (Eugenio et al. 2009). Ronald Trostle, an economist at the US
Department of Agriculture’s Economic Research Service, notes that

these new investors were not so much interested in agricultural

commodities as they were using commodities to diversify their financial
portfolios and observes that, while it is difficult to lay the blame for higher
prices squarely at the door of speculators, investment funds’ use of
automated trend-following trading practices may well have served to
increase price volatility. (Trostle 2008)

Commodity investors and hedge fund activity also seems to have played a
minor role (World Bank 2008).
Another important factor has been weather-related supply disruptions. For
example, in 2005 extreme weather in a number of major food-producing
countries caused world cereal production to fall by 2.1 per cent in 2006 (FAO
2008). Australia was particularly affected, suffering its worse multi-year
drought in a century. Russia and Ukraine, meanwhile, entered a two-year
drought in 2006, and 2007 saw further impacts including a dry spring
followed by harvest-time floods in Northern Europe, a hot and dry growing
season in Canada with lower yields for wheat, barley and rapeseed, and
droughts in southeast Europe, Turkey, northeast Africa and Argentina (ibid).
Finally, there is the effect of export restrictions imposed as a means of curbing
domestic food price inflation in exporting countries. This has been matched by
a move from importing countries to reduce their trade barriers so as to try to
increase imports, build stocks and control inflation.
The increases in food prices since 2007 are not unusual, if viewed in the
context of the history of grain prices over the last several decades. The
behaviour of food prices for crops such as maize, rice and wheat during
[2007–2012] is not qualitatively different from that of the early 1970s and of
1996–1997. The upward price increases occurred systematically in periods
of unusually low levels of aggregate stocks (Eugenio et al. 2009; FAO 2011).
Trends in demand due to income growth in China and India, droughts in some
major producers of food and the growth of biofuel exacerbated by price
increases in oil prices all have their part in explaining low stocks since 2007,
although there was some food stock recovery during 2008. However, most
writers agree that biofuel will be the most important driver of food prices for
the future. According to Baffes (2009: 6):
 Among the many factors that will shape the long-term outlook for
agricultural and food commodity markets are: the increased linkage
between energy and non-energy commodity prices; biofuel mandates and
subsidies, which are likely to play a key role in food markets; investment
fund activity which is likely to continue or even intensify, implying that
increased price volatility for most commodities will be the norm; economic
growth prospects in developing countries where consumption of extractive
and industrial commodities is growing faster; and changing weather
patterns due to global warming. All these will affect production and the
trading patterns of agricultural commodities.

Furthermore, the economic and financial crisis of 2009, which overlapped

with the food crisis period, pushed the prices of basic staples beyond the
reach of millions of poor people. Developing countries today are more
financially and commercially integrated into the world economy than they
were 20 years ago, and therefore they are more exposed to shocks in
international markets (FAO 2009a). This argument was made by Mackie
(1974: 20), in his concluding remarks on the causes of the first food crisis in
1973:

The world appears to have entered a new era of uncertainty with respect to
the availability of basic supplies of foods and raw materials. Uncertainty
itself is familiar, but what is new is the high degree of interdependency of
nations attained in recent years in production, consumption, and trade of
agricultural products combined with low levels of stocks. This
interdependency creates instantaneous disequilibrium in international
commodity markets when either demand or supply of basic commodities is
radically altered.

On the same note the FAO (2009a) describes how the current economic crisis
is different from the previous crises, for two main reasons. First, the crisis is
affecting large parts of the world simultaneously, and as such traditional
coping mechanisms at national and sub-national levels are likely to be less
effective than they were in the past. Second, since 2009 many countries have
seen a substantial decline in the inflow of remittances, which has weakened
the coping mechanisms of poor households.
Having discussed the causes of world food price volatility from the 1970s
until present, the following section focuses on how world food prices