The spike in international prices of cereals that took place in 2007/08 can be seen as the outcome of many factors operating over the medium, short and very short term. There is general agreement on most of the causes, including: poor harvests, low cereals stocks, rising oil price, generalised inflation, export bans and restrictions, restocking in tight markets, reduced import tariffs, and depreciation of US dollar.
There is less agreement on three other factors: first, the influence of rising demand from the booming economies of Asia —probably not a cause; second, the diversion of maize into ethanol production in the US — responsible for perhaps 30% of the rise in prices; and, third, the role of speculation in futures markets for maize and wheat — controversial and difficult to prove.
This combination of multiple causes can be seen as an unusual event — ‘a perfect storm’ — in which it is difficult to judge the weight of any given cause. Moreover, maize, rice and wheat prices responded differentially to these factors.
While these factors are unlikely to combine again, other trends, particularly higher oil prices, increasing scarcity of irrigation water and climate change mean that cereals prices will be higher than in the past and that spikes could be more common.
Policy makers thus need to:
- Ensure that cereals production keeps pace with increasing demand, through adequate public investment and incentives to farmers;
- Improve information on grain stocks so that traders and governments have warning of dangerously low stock-to-use ratios;
- Reconsider biofuel policies and particularly mandatory quantitative targets; and, possibly,
- Work towards understandings in international trade deals that export restrictions will only be applied in emergencies, and preferably with some warning to trading partners.