Real causes of the 2007-2008 food crisis

During the 2007-08 food price crisis and its immediate aftermath, those seeking to understand the causes faced an abundance of suspects but little proof. Two years later, with renewed volatility in agricultural commodity markets and concern about another crisis in the news, there is a good deal more evidence. Much of it challenges earlier hypotheses about what went wrong and what should be done to avert trouble in the future.

In 2007 and 2008, food prices surged chiefly because of rising energy prices, growing demand for biofuels, and a weakening US dollar. New data also show that export restrictions by major grain producers worsened matters in rice, wheat and maize markets, triggering panic purchases by countries that feared trading partners would cut off supplies and leave them without enough food for their people. This surge in demand also reduced stocks. In short, export bans turned a critical situation into a calamity.

Two previously prime suspects - financial speculation and the spread of affluent diets - turn out to have been less important. There is no conclusive evidence that financial speculation in agricultural commodity markets was a principal cause of the crisis of 2007-08. Consequently, while tightened regulation of futures markets could, if done right, produce some benefits, focusing an undue amount of attention on fixing financial markets will certainly not suffice to prevent another food crisis.

Contrary to what many had previously thought, increased demand for meat products in rising economies such as China and India did not trigger the crisis by driving up demand for livestock feed. Although China's demand for oil and other non-food commodities played a role in sustaining high prices, the evidence is now unequivocal: China and India were not buying up the world's grains.

The effects of the crisis were felt unevenly, but they were significant. Estimates of the number of people who were pushed into hunger by runaway food prices in 2007 vary from around 75 million to 133 million. Countries were particularly vulnerable to rising prices if they relied heavily on imported food, and if they were also beset by domestic problems such as conflict, drought, or poor economic policies. However, other countries were protected against rising prices by strengthening currencies, a diversified food base, and a limited dependence on food imports.

Some of the elements of the last crisis are present today. As in 2007, producers in several key grain producing countries have been hit by bad weather or wildfires, which have again prompted export restrictions. Since June 2010, the prices of wheat and maize have increased by 60 and 50 percent, respectively. But in other respects, the current situation is quite different. The world's grain reserves are more plentiful than they were then. And although Russia is withholding wheat exports, Thailand and Vietnam have eased pressure on rice prices by increasing their exports of this staple crop.

The key to averting the next global disaster is to learn some important lessons from the last one.  In the short run, trade in agricultural commodities must be kept open. Food-importing countries must know that they will not be cut off at the whim of major exporters. Countries like India and China should release grain to calm markets. Biofuels should be made more "food friendly" by eliminating subsidies for biofuels crops that are also important foods, such as maize. We know that biofuels production using these crops competes with food, that claims regarding environmental benefits owe more to hyperbole than anything else, and that subsidies in the United States and Europe hurt the majority of the world's farmers, who are poor smallholders.

In the medium to longer term, agricultural production must be increased, particularly in countries where smallholder farming is still predominant. Extensive research shows that investments that raise agricultural productivity in developing countries remain the best means of improving the food security of poor people in both rural and urban areas. Social safety nets should also be expanded or enhanced in potentially food-insecure countries. Climate change, resource degradation, and other long-term threats to agricultural productivity must be addressed. And although lower grain stocks were more an outcome of the last crisis than a cause, buffer stocks could avert future crises. Globally coordinated strategic grain reserves should be established and used to deal with humanitarian emergencies and to smooth out volatility.

Progress will require political will and funding. To their credit, many aid donors have said they would increase agricultural aid. In 2009, the G-8 nations made more than US$20 billion in commitments to food security and agriculture. They must keep their promises.