A note on rising food prices

Back on the 5th of July I commented on a Secret report: biofuel caused food crisis. Aditya Chakrabortty, economics leader writer for the Guardian, wrote an article based on a then unavailable World Bank report unofficially obtained by the Guardian. The document, dated April 8 2008, the Guardian used is A Note on Rising Food Prices (pdf) prepared by Donald Mitchell - Lead Economist, Development Prospects Group (DECPG), World Bank, Washington. The Summary of the document reads

The World Bank's index of food prices increased 140 percent from January 2002 to February 2008. This increase was caused by a confluence of factors but the most important was the large increase in biofuels production in the U.S. and EU. Without the increase in biofuels, global wheat and maize stocks would not have declined appreciably and price increases due to other factors would have been moderate. The export bans and speculative activity would not have occurred because they were responses to rising prices. Higher energy and fertilizer prices would have still increased crop production costs by about 15 percent in the U.S. and lesser amounts in other countries with less intensive production practices. The back-to-back droughts in Australia would not have had a large impact because they only reduced global grain exports by 4 percent and other exporters would normally have been able to offset this loss. The decline of the dollar has contributed about 20 percentage points to the rise in food prices. Thus, the combination of higher energy prices and related increases in fertilizer prices, and dollar weakness caused food prices to rise by about 35 percent from January 2002 until February 2008 and the remaining three-quarters of the 140 percent actual increase was due to biofuels and the related consequences of low grain stocks, large land use shifts, speculative activity, and export bans. The growth in global grain consumption (excluding biofuels) was 1.7 percent from 2000 to 2007 while yields grew 1.3 percent and area grew by 0.4 percent.

So the World Bank's index of food prices increased 140 percent from January 2002 to February 2008 and of that increase 75% is down to biofuels.

The World Bank has now released, 1 July 2008, an official version of the Mitchell paper, A Note on Rising Food Prices. The abstract of this version reads,

The rapid rise in food prices has been a burden on the poor in developing countries, who spend roughly half of their household incomes on food. This paper examines the factors behind the rapid increase in internationally traded food prices since 2002 and estimates the contribution of various factors such as the increased production of biofuels from food grains and oilseeds, the weak dollar, and the increase in food production costs due to higher energy prices. It concludes that the most important factor was the large increase in biofuels production in the U.S. and the EU. Without these increases, global wheat and maize stocks would not have declined appreciably, oilseed prices would not have tripled, and price increases due to other factors, such as droughts, would have been more moderate. Recent export bans and speculative activities would probably not have occurred because they were largely responses to rising prices. While it is difficult to compare the results of this study with those of other studies due to differences in methodologies, time periods and prices considered, many other studies have also recognized biofuels production as a major driver of food prices. The contribution of biofuels to the rise in food prices raises an important policy issue, since much of the increase was due to EU and U.S. government policies that provided incentives to biofuels production, and biofuels policies which subsidize production need to be reconsidered in light of their impact on food prices.

The report notes

The IMF’s index of internationally traded food commodities prices increased 130 percent from January 2002 to June 2008 and 56 percent from January 2007 to June 2008

In the Summary and Conclusions section Mitchell writes

Thus, the combination of higher energy prices and related increases in fertilizer prices and transport costs, and dollar weakness caused food prices to rise by about 35-40 percentage points from January 2002 until June 2008. These factors explain 25-30 percent of the total price increase, and most of the remaining 70-75 percent increase in food commodities prices was due to biofuels and the related consequences of low grain stocks, large land use shifts, speculative activity and export bans.