Has the Food Price Bubble Burst?


Has the global food price bubble  burst, and if so, does it matter? In the first installment of FSE's new Food and Nutrition Policy Symposium Series, Professor Thomas Hertel of Purdue University and Professor Johann Swinnen of Leuven University outlined global trends in the cost of food, and explained how a drop in prices after the food price shocks of 2007-2008 might affect global politics and economics.

What drives food prices?

As population growth and rising incomes put pressure on the global food supply, many scholars consider high food costs to be the "new normal," especially following the food price shocks of 2007-2008. Professor Thomas Hertel challenged this view, saying that "To look forward 45 years, you have to look back 45 years" at what factors actually impact food prices.

Prices for many food commodities fell between 1961 and 2006, despite strong population and income growth, because the world was able to triple crop production during the same period. Since the recent price spikes, the "food price bubble" seems to have burst, with prices falling steadily since 2009.

Although population will continue to grow over the next several decades, the rate of growth is slowing worldwide and is mostly concentrated in developing countries, where per capita purchasing power is relatively low. This minimizes the pressure that population growth puts on the global food supply.

Economic factors may be more influential. "For the first time in history," Hertel said, "income will surpass population as a driver of global food demand." As countries move up the income scale, they consume richer diets of input-intensive products like meat, dairy and processed foods.

Energy prices also influence global food costs. As oil and gas prices rise, demand grows for alternative fuels like ethanol. Half of the increase in corn production over the past several decades came from the growing demand for ethanol, which was fueled by government mandates and which drove up the global price of corn. These mandates have been rolled back in recent years, however, and demand growth for biofuels has waned.

Hertel added that issues around climate change, urbanization, water supply, food waste and deforestation may also impact global food prices in the future.

Many scholars point to crop yields as a way to close the gap between food supply and demand and keep prices low. But Hertel cautioned that scientists and policymakers may be constrained by technical and economic limits.

To further increase yields "is a bigger job than simply doing some more science in the lab," Hertel said. But he noted with optimism that new investments in research and development have risen sharply from both the public and private sector, particularly in countries like China, India and Brazil where food security is a pressing issue. 

Impacts of the food price bubble

Professor Johann Swinnen explained that if the food price bubble has in fact burst, the next several years are likely to bring a shift in the politics and economics of global food issues.

The recent bubble coincided with an increase in both policy attention and donor funding to combat food insecurity - a focus that has benefitted both farmers and consumers, but that could wane as prices fall.

While the high prices of 2007-2008 benefited farmers, they in turn hurt low-income consumers in urban areas. And because people in high-density areas find it easier to organize and voice their concerns over government policies, they are more likely to capture media attention.

This "urban bias," as Swinnen described it, influenced policymakers to respond to the heavy media coverage. His team found that after 2007, agricultural funding from the World Bank, United Nations Food and Agriculture Organization (FAO) and the International Maize and Wheat Improvement Center (CIMMYT) all rose sharply. The percentage of global development aid targeted toward agriculture also grew.

Swinnen described the social and political conditions of 2007-2008 as a "perfect storm" that shifted the attention of policymakers toward global food security investments. Paradoxically, Swinnen explained, this policy response to urban unrest over food prices ultimately benefitted both rural and urban populations, by boosting agricultural investments for food producers while also helping lower costs for consumers.

 The Food and Nutrition Policy Symposium Series will run for three years and will consist of a total of ten lectures spanning a wide range of issues around global food and nutrition policy. It is funded by Zachary Nelson, '84 and Elizabeth Horn. The series follows on the successful two-year Global Food Policy and Food Security Symposium Series which concluded in May 2013 and was funded by the Bill and Melinda Gates Foundation.