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Brookings: Making Sense of Food Price Volatility

Author: Homi Kharas
March 3, 2011

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Homi Kharas argues that global food inflation is a result of increasing oil prices and a lack of sustained agricultural investment, not speculators or inept governments.

Food prices have risen to record highs for the second time in three years. Some blame the hedge fund speculators who have funneled large amounts of money into futures contracts in food markets. They argue that market mechanisms are broken and need fixing. Others blame their governments (look at the riots in the streets of several developing countries) and find fault in the political systems, corruption and cronyism that have robbed them of the resources to afford higher food prices. Their solutions are political. Still others look to pervasive poverty and high income inequality as the reason why food price volatility is of such concern. They focus on the social aspects and solutions.

This separation into markets, politics and social stability is actually a useful frame for understanding how food prices affect developing countries and what needs to be done at a policy level. The issues are of course interconnected but too often the discourse becomes confused as one thread leads to another and the logic gets tangled.

As an initial point, it's worth stressing that the crux of the food price challenge is about price volatility, rather than high prices per se. It is the rapid and unpredictable changes in food prices that wreak havoc on markets, politics and social stability, rather than long-term structural trends in food prices that we can prepare for and adjust to. And it is also worth noting that volatility cuts both ways—prices go up and down. The only reason food prices are going up so much this year is because they came down so fast after reaching 2008 peaks. Both rapid increases and rapid declines in food prices can create problems.

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