Share

IFPRI Discussion Paper 00958, March Derek D. Headey (2010)

This article argues against the conventional explanations of the 2008 global food crisis and suggests that trade factors were more important than previously realized.

Headey advances an argument against conventional explanations of the recent global food crisis.  His main critiques of the standard theory are twofold: “First, previous explanations of commodity overshooting that relied solely on dollar depreciation or low interest rates do not plausible explain the size or timing of commodity price changes, whereas large trade shocks generally precede sharp price changes and provide a very tangible price explanation to boot. Second, we strongly suggest that these initial pressures would not have resulted in a full-blown crisis had it not been for the trade restrictions and demand surges” (25).

Headey argues that there are several problems with the prevailing food price forecasting models in use.  Firstly, the food price simulation models used by the FAO, OECD, USDA, and IFPRI all failed to predict the 1974 and 2008 food price crises.  In particular, the supply and demand elasticity estimators used in these models are problematic because they are distorted by panic buying, speculation, and hoarding.  He notes that “the effective short-run demand and supply elasticities experienced value changes and even sign switching. This was largely because of government policies; there were numerous export restrictions and government-to-government purchases, and some governments (for example, Argentina) changed their export policies every few months throughout 2007 and 2008” (5).  Secondly, such models are not very useful in crisis situations because of their time-lag specifications and interaction effects.  Thirdly, causality is suspect in such models.  Headey suggests that an appropriate analogy is financial speculation, in which “justified expectations of higher prices could drive up activity in the futures market, which could in turn drive up spot-market prices” (6). 

Instead, Headey contends that trade shocks played a more important role in the global food crisis than realized.  He writes that “In most of the research and media reports on the food crisis, there has been very little emphasis on trade events; instead, the vast majority of the attention has focused on biofuels, oil prices, changing Asian diets, and financial speculation. However, the analysis herein suggests that trade events were pervasively important in all of the major grain markets and arguably provide the most tangible explanation for the overshooting dynamics apparent in price series data” (25).  He examines monthly trends in rice, wheat, and maize prices in detail, finding that export restrictions drove price hikes that rippled across product markets.  While starting factors such as oil prices, biofuels demand, a weak US dollar, and growing Asian demand put upward pressure on grain prices, trade responses dramatically compounded the problem.

Headey concludes with some policy recommendations.  In particular, he argues that it is imperative to keep export markets open in the future, as export restrictions were a key driver of the global price spike.  In terms of negotiating strategy, Headey recommends that “new international agreements must be: (1) truly international and binding… but (2) flexible enough to leave policymakers the option of employing infra-marginal policy instruments (such as capped export taxes) that can keep their food prices sufficiently stable” (26).  The second point is particularly important because “Without this flexibility, it is highly likely that Asian countries (for example, India, Vietnam and China) will either refuse to sign the multilateral agreement, or will quickly defect from such an agreement when the next round of pressure emerges” (26).  With projections of rising food prices over the next ten years and the potential for volatility and punitive trade restrictions, Headey suggests that such an agreement is essential because “the world’s poor can ill afford the next world food crisis” (26).