The 2007/08 Agricultural Price Spikes: Causes and Policy Implications
UK Government, 2010
- In-depth study of the extent of the price spikes, their causes and suitable policy responses. Complemented by several annexes (e.g. on export restrictions, grain stocks, speculation, and the international supply response in 2008).
- Low projected global stocks/use ratios in 2007 and 2008, combined with uncertainty, during the first half of 2008, about the size of the 2008 crop;
- The rapid increase in global energy prices increasing the cost of agricultural inputs, especially fertilisers, so increasing the cost-base of agricultural producers, particularly in the cereals and oilseeds sector;
- A significant weakening of the US Dollar helped to increase Dollar denominated international prices; and
- Export restrictions in a number of countries which exacerbated the price increases for wheat and maize, and arguably triggered the price spike in the rice market.
Broader causes affecting consumption, production and stock levels
- The reduction of stocks in China due to a policy to reduce the very large grain stocks it had accumulated in the 1990s;
- A combination of population growth and economic growth in developing and transitional economies, increasing demand for animal protein (typically much more resource/grain intensive than plant proteins), although there is a real danger of overstating the size of this effect;
- Poor wheat harvests in 2006 and 2007; and
- Biofuels – the use of grains, especially maize in the United States, has grown significantly in the last ten years.
- Agricultural trade reform and an ambitious Doha deal in the World Trade Organization;
- Initiatives to reduce the prevalence of export bans;
- Improving the functioning of agricultural land, labour and capital markets, and the provision of infrastructure;
- Improving the functioning of national agricultural product markets and the phasing out of agricultural subsidies, such as Pillar 1 of the CAP (market price support and direct payments);
- Facilitating the establishment, growth, and use, of market mechanisms for the management of agricultural price risk; and
- Scrutiny, and where necessary reform, of biofuels policy to ensure that biofuel consumption is only supported if it secures cost effective net green house gas savings, and to ensure that biofuel mandates are sufficiently flexible so that any future demand rationing affects biofuels as well as the food and feed sectors. Similar consideration will also need to be given to the use of biomass for heat and electricity, which may impact on the food and feed sectors through possible competition for land-use.
- Research and development (where there are long lead times), and the transmission of technical developments to farmers which can have a very significant impact on the level of agricultural productivity under any given price or climatic scenario;
- Agricultural and more general economic development, not least because hunger and food insecurity are first and foremost a function of poverty, and higher incomes make households more resilient in the face of higher prices;
- Social protection mechanisms, both at national level and internationally; and
- Systems to provide humanitarian food assistance where social protection and safety nets are insufficient e.g. following natural disasters.
- The study puts the 2007/08 price spikes into perspective: real food prices on the world market remained well below the level of the 70s, and in the UK, the ‘crisis’ simply undid the decreases in real food prices of the preceding 10 years.
- The right policy response is not to move back to increased agricultural protectionism in Europe but to advance the integration of EU and world markets for agricultural products – and to enhance assistance to the poor in developing countries.