AGRICULTURAL

ECONOMICS

Agricultural Economics 39 (2008) supplement 375–391

Anatomy of a crisis: the causes and consequences of surging food prices

∗
Derek Headey and Shenggen Fan
International Food Policy Research Institute (IFPRI), 2033 K Street, NW, Washington, DC 20006-1002,
USA
Received 23 August 2008; received in revised form 19 September 2008; accepted 21 September 2008

Abstract
Although the potential causes and consequences of recent rising international food prices have attracted widespread attention, many existing
appraisals are superficial and/or piecemeal. This article attempts to provide a more comprehensive review of these issues based on the best and
most recent research, as well as on fresh theoretical and empirical analysis. We first analyze the causes of the current crisis by considering how
well standard explanations hold up against relevant economic theory and important stylized facts. Some explanations turn out to hold up much
better than others, especially rising oil prices, the depreciation of the U.S. dollar, biofuels demand, and some commodity-specific explanations.
We then provide an appraisal of the likely macro- and microeconomic impacts of the crisis on developing countries. We observe a large gap
between macro and micro factors, which, when identifying the most vulnerable countries, often point in different directions. We conclude with a
brief discussion of what ought to be learned from this crisis.

JEL classification: N50, O11, O12, O13

Keywords: Agricultural policy; Commodity markets;

Biofuels

1. Introduction developing economies in particular, will be able to effectively

respond to these challenges.
Since 2003, international prices of a wide range of com- The first objective of this article is to provide a
modities have surged upward in dramatic fashion, in many comprehensive assessment of the potential causes of recent
cases more than doubling within a few years, in some cases food price surges. The second objective is to review the
a few months. A surge in the price of food is of special con- potential consequences on the poor, either directly through
cern to the world’s poor. Many impoverished people depend increased costs of living, or indirectly through changes in
upon food production for their livelihood, and virtually all macroeconomic conditions. The approach we use is to review
poor people spend large portions of their household income the most credible and most recent literature on the issue,
on food. Sharply rising prices offer few means of substitution although we occasionally augment ex- isting evidence where
and ad- justment, especially for the urban poor, and there are necessary and feasible (a fuller working paper version of this
justifiable concerns that millions of people may be plunged article provides much of this analysis). We also highlight
into poverty by this crisis, and that those who are already research questions that remain largely unan- swered, and
poor may suffer still more through increased hunger and comment briefly upon the central challenges facing
malnutrition. Equally grave concerns are felt with respect to policymakers in the midst of the crisis.
the impacts that food and fuel inflation may have on
macroeconomic stability and economic growth, given that the 2. The causes of the crisis
first global commodity crisis of 1974 coincided with an end to
the “Golden Age” of post-War economic growth. Since the A wide range of research has attempted to identify which
current crisis most likely involves a more persistent rise in factors might have caused the recent surge in food prices (Ab-
commodity prices, there is considerable uncertainty about bott et al., 2008; Baltzer et al., 2008; Helbling et al., 2008;
how well the world economy in general, and Schnepf, 2008; Trostle, 2008; von Braun, 2008), and only one
∗
Corresponding author. Tel.: +1-202-862-8103; fax: +1-202-467-4439. paper to date has attempted to add explicit orders of magni-
E-mail address: d.headey@cgiar.org (D. Headey). tude to different factors (Mitchell, 2008). In this section we

c 2008 International Association of Agricultural DOI: 10.1111/j.1574-0862.2008.00345.x

Economists
376 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375–
391

Source: IMF (2008b). Data are deflated by the U.S. GDP deflator.
Fig. 1. Trends in real international prices of key cereals: 1960 to May
2008.
review, reassess, and extend the evidence on this issue. The will argue below that there are good grounds to argue that
current crisis is a global phenomenon, and one that is they
regarded by many as a distinct event. This means that some of are.
the usual tools favored by economists for uncovering A fourth stylized fact is that prices of a wide range of com-
causality, such as regression analysis, are quite limited in this modities have increased sharply. The surge in the price of oil
Table 1
context. Instead, the most appropriate research on this issue
Percentage changes of prices across commodity groups in the 1974 crisis and
needs to rely on some less formal detective work, involving a today (2000 USD)
mix of economic theory and reasoning, economic history, and
rudimentary sta- tistical analysis. Within the latter, the most Commodity % Change from:
important questions we must ask are whether individual 1970–1974 2004–2008 01/08–05/08
explanations of the crisis are consistent with the stylized facts (% 2004–2008)
of the crisis. What are these facts? Food
Staple crops 148.4 101.9 61.7 (60%)
Wheat 159.8 81.4 23.6 (29%)
2.1. The stylized facts of surging commodity Maize 80.4 88.5 43.1 (49%)
Soybeans 88.0 52.9 47.9 (48%)
prices
Rice (Thailand) 200.6 255.4 191.4 (75%)
Fig. 1 presents export price series from 1960 to May of Nonstaple crops 159.3 58.3 45.8 (79%)
2008 Meat 24.5 4.5 10.7 (100%)
for four major staples—maize, wheat, soybeans, and rice— Beef (Brazil) n/a 40.2 21.7 (54%)
as measured in key markets in the United States, and in the Seafood 53.0 18.0 −5.7 (0%)
case of rice, Thailand (Bangkok). All measures are in U.S. Other agricultural commodities
dollars (USD) and are deflated by the U.S. GDP deflator. Textiles 107.5 5.5 2.3 (42%)
Wood 34.7 13.2 4.5 (34%)
Table 1 presents some of the same data, but more narrowly
Cash crops 49.4 61.3 17.8 (29%)
examines changes of real prices over particular periods of
Fertilizers 299.4 379.4 200 (53%)
interest. From these data, we garner the following factors. ∗
389.0 369.1 166.0 (45%)
DAP: U.S. GULF
First, the most recent (May 2008) price levels are about as Potash 475.3 381.8 193.5 (51%)
high as they were in the late 1970s or early 1980s, in real Metals 79.9 119.3 7.9 (6.6%)
terms. Second, prices have risen very quickly. The rise in Energy
prices in the current crisis is similarly sharp in percentage All energy 274.9 127.3 59.7 (47%)
terms to the price shocks of 1974 crisis, although somewhat Petroleum 325.0 182.8 65.7 (36%)
more spread out (also see Table 1). In both crises, rice prices Coal 74.3 81.3 85.8 (100%)
Natural gas n/a 98.5 38.9 (39%)
shot up the most (200% in the 1974 crisis, 255% in the most
General prices
recent cri- sis), but wheat prices rose very sharply in 1974 U.S. GDP deflator 26.0 15.5 4.2 (27%)
(160%), and maize and soybeans both exhibited rapid price USD per SDR 22.4 9.1 2.6 (28%)
increases on the order of 50–90%. Third, prior to the current
price rise the real prices of staple foods were at an all time Notes: The source is IMF (2008b). All commodity prices are deflated by
the U.S. GDP deflator so as to be expressed in constant (2000 USD) terms.
low after de- clining for the best part of 30 years. Whether ∗
DAP is Di-ammonium Phosphate. The full list of commodities can be found
these long-run trends and the similarities of the 1974 crisis in the appendix.
are truly integral components of the current crisis remains to
 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375– 377
391
well known, of course, as is the fact that this was a leading planation, both India and China have long been self-sufficient
factor in food, including the staple commodities for which interna-
in the 1974 food crisis, but all energy prices have recently tional prices have been rising. In fact, China imported less
risen by 80–120%, as have the prices of metals and minerals, wheat in 2000–2007 (33.8 million metric tons) than it did in
and fertilizer prices have roughly quadrupled in both crises. the preceding eight years (40.3 million mt), and its rice im-
Other agricultural commodities (e.g., cash crops) have not ports also declined slightly from already low levels (just over
risen any- where near as quickly, however. These patterns beg 5 million mt). Indian imports of wheat and corn have also
the question of whether food-specific factors are driving the been negligible, and India is generally a net exporter of rice.
surge in food prices, or some other factors that have common If there is a China–India story, it is through very indirect
effects across these commodity groups, such as increasing chan- nels by which these countries have influenced demand
energy costs, the depreciation of the USD, growing for oil (IEA, 2007) and global trends in stocks (see below).
commodity demand from China and India, or investment Also, the one agricultural commodity group for which
portfolio adjustments related to low interest rates and the China and In- dia have sizably increased their demand is
bursting of the U.S. real estate bubble. oilseeds, but this “surge” began in the mid 1990s, rather than
A fifth stylized fact is that the timing of price rises is some- recently. We do know that increased oilseeds demand from
what different across commodities, and even across staple Asia had some ef- fect on global markets—soybean imports
foods. Most of the price rise in wheat and maize occurred within the developing world rose from 20.4 to 33.5 million
prior to 2008, but three-quarters of the increase in the price tons from the mid-1990s to the present, a trend that
of rice occurred in 2008. A sixth stylized fact is that the USD contributed to U.S. farmers increas- ing soybean production
has depreciated against a wide range of currencies. Against area by over 11 million hectares—but we estimate that grain
the other SDR currencies (UK pound, Euro, and the Japanese production in the United States would only have been 3%
yen), the USD has depreciated some 30% since the start of higher today than if this switch had not been made. 1
2002. Since all of the commodities in Table 1 are expressed in Moreover, it seems unlikely that rising soybean demand from
USD, the price increases are much less sharp when measured the early- to mid-1990s is likely to explain a sudden and
in Eu- ros, for example, than in USD. The increase in nominal largely unforeseen price shock 10 years later. In fact, China
prices of key staples is around 25% less when measured in and India’s steadily growing demand may provide a unique
Euros, somewhat less than that when measured against USDA op- portunity for many of the developing world’s
trade- weighted agricultural exchange index, and roughly the smallholders to increase their production and incomes
same as the pound and the yen. Some authors also consider (Obwona and Chirwa,
USD depreciation to be a causal factor, an issue we take up 2006).
again below. Another factor we are less than convinced by is specu-
In addition to these stylized facts, we might posit one ad- lation in financial markets, an explanation widely discussed
ditional criterion that any plausible explanation of the crisis but poorly understood and only superficially researched.
must satisfy: a potential determinant of the crisis must either How- ever, a recent Conference Board of Canada working
precede the crisis, or at least distribute its effects contempora- paper on this issue provides an authoritative review of the
neously to the rise in prices. The implication of this is that a issue (CBC,
factor that emerged long before the crisis (e.g., 10 years), or 2008). One of the principal reasons for concern over futures
only emerged very late in the game (e.g., 2008), would be a markets is that their emergence has brought the increasing
significant determinant of price rises. participation of “noncommercial” participants in agricultural
2.2. Assessing the principal causes of the crisis markets, or speculators. 2 However, causal linkages between
1
This is a simple back-of-the-envelope calculation. If new areas of U.S.
farmland devoted to soybeans since 1994 had been used for corn, and those
Against these stylized facts, let us then consider each of areas followed yield growth of the actual areas of land used for corn, then
the widely posited explanations of the crisis. These are listed corn production today would be 3% higher. However, this shock is very small
individually in Table 2, which also provides an assessment of in comparison to the reduction in corn food supply from increased biofuels
the strengths and weaknesses of each explanation. One might demand.
2
The U.S. Commodity Futures Trading Commission (CFTC) has gradually
also add the hypothesis of a “Perfect storm”—an interaction
loosened the rules over who may trade in agricultural futures markets to the
and conflagration of factors—which we will consider in more point that by 2008, index funds, for example, accounted for about 40% of the
detail below. futures contract trading in wheat. Nontraditional participants can now
Our basic conclusions are as follows. First, we more or less speculate on food price trends since the value of a futures contract varies in
unequivocally reject rising demand from China and India as relationship to the commodity prices in the current spot market, much as
bond prices vary in response to changing interest rates. The further in time
an important cause of the crisis. Many writings on the cri-
the futures contracts are, the more they are likely to reflect expectations of
sis have specifically referred to changing consumption future prices as opposed to the actual prices that exist today. This affords
patterns in China and India, particularly the rapid growth in speculators an opportunity to bet on futures contracts as a separate asset class
meat and vegetable consumption. Unfortunately for advocates quite apart from the spot prices of agricultural commodities in today’s
of this ex- market.
378 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375–
391
Table 2
Explanations of the 2005–2008 global food crisis, and their strengths and
weaknesses
Explanation Strengths Weaknesses

Growth in demand from Partly explains rising oil prices, partly explains demand for China and India are self-sufficient in most major grains, but have
China and India oilseeds. not increased imports of any staple foods.
Financial market Increased financial market activity coincides with rise Higher prices induce speculation, so causality argument is weak;
speculation in prices. no clear evidence yet of causal link.
Hoarding: export Price rises for rice were preceded by export restrictions by Wheat, maize, and soybean price rises generally preceded
restrictions countries that account for 40% of global rice exports. restrictions; biggest players did not impose restrictions
Weather shocks Australian wheat production 50–60% below trend growth Only explains wheat prices; production shocks of this magnitude
rates in 2005 and 2006; there were also moderately poor are common in international wheat markets, and in Australia
harvests in United States, Russia, and Ukraine. over the last 15–20 years.
Productivity Production and yield growth of rice, wheat and maize has Productivity slowed, but it is not clear that demand outpaced
slowdown slowed down over the last 20 years or so. supply over this time period.
Low interest rates Low interest rates ought to increase demand for storable Stocks/inventories of gold and oil are reasonably high, but stocks
commodities, increase stocks, and shift investors from of staples are low; no clear evidence that futures markets are
treasury bills to commodity contracts. affecting spot prices (see above).
Depreciation of the USD Real agricultural trade-weighted index for United States No critical weaknesses; Mitchell (2008) calculates that this factor
depreciated 22% over 2002–2007; USD and commodity probably increased dollar-denominated prices by 20%.
prices are covariate.
Rising oil prices Have risen sharply and somewhat preceded food prices; No critical weaknesses, although some authors expect the effects
large component of production and transport costs, of
especially in wheat and corn production. rising oil prices on food prices to be more delayed and to have a
Biofuels demand Has surged since 2003, and consumed 25% of U.S. corn crop larger impact via biofuels demand.
in 2007; two-thirds of global maize exports are from Strong for corn, less so for wheat, although substitution effects
United States. could account for rise in other products.
Decline of stocks Low stocks are traditionally associated with increased Netting out China makes the decline in stocks less dramatic.
sensitivity to shocks; stocks of all major cereals declined Unless
prior to the price surge. stock declines result from policies, declines only represent the
effects of other factors.
Source: Authors’ construction.

to do with the fact that financial speculation through secu- and both the price level and volatility for most agricultural
ritization is most profitable when there is substantial volatil- com-
ity in the underlying markets: when markets are in turmoil, modities have continued to rise in 2008. However, a study of
expectations of future prices may vary considerably (CBC, the emerging lack of convergence between cash and futures
2008). This suggests that speculation may be more a symp- prices has not identified any significant causal factor (Irwin et
tom of underlying volatility than a cause of that volatility. al., 2007). Other analysts have suggested that agricultural
Also, many of the charges made against financial markets com- modity markets are now playing a role traditionally
relate to their efficient function more than their effect on reserved for gold and other precious metals—a safe haven for
spot prices per se. 3 investors—but data from the U.S. Commodity Futures
Finally, what evidence there is of impacts on spot prices Trading Commission (CFTC) suggest that the balance
is largely anecdotal, and again, rarely indicative of causality. between long (noncommer- cial) and short (commercial)
The contract price volatilities of corn and wheat futures price positions has been more or less maintained. Another charge is
indexes have increased from 19.7% and 22.2% since 1980 to that securitized foods have ex- perienced more price volatility
28.8% and 31.4% in 2006–2007, respectively (Schnepf, than nonsecuritized foods (van Ark, 2008). Yet several
2008), nonsecuritized foods have indeed ex- perienced rapid price
3
increases, 4 and the fact that the securi- tized commodities
Since 2006 the convergence between futures contracts and spot prices has
may have been selected for futures markets precisely because
been incomplete, perhaps indicating that the price discovery mechanism of
fu- tures markets has been compromised by speculative activity. Second, of some distinguishing characteristics—for example, rising or
hedging against risk may become more complex for producers if the futures less elastic demand, greater volatility, larger U.S. production
market is driven less by agricultural fundamentals of supply and demand and —suggests that simple comparisons of securi- tized and
more by the speculative activity of uninformed noncommercial investors. nonsecuritized futures prices may not be valid in any case. In
Third, since futures contract market participants are required to sustain a
maintenance mar- gin of around 75% of the initial margin position,
summary, we conclude that although futures markets may
speculation and exaggerated reaction to markets news (“animal spirits”) could 4
For example, some nonsecuritized commodities have experienced consid-
induce excessive volatility in the market, which could lead to margin calls erable prices increases, including rubber, onions, and wide range of metal and
that significantly impinge on the working capital of smaller agricultural energy commodities (coal, iron ore, minor metals, steel) (Gilbert, 2008).
players.
 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375– 379
391
2008 (an amount that exceeded their entire import bill of
2007).
This surge continued until May when Japan released 200,000
tons of rice to the Philippines, partly as a result of work by
Slay- ton and Timmer (2008). Prices fell almost immediately.
This was followed by further price declines after Cambodia
lifted its export ban in June. Hence, it appears that the
remarkable and very costly surge in rice prices in 2008 was
largely due to the reactions of traders to export restrictions
and hoarding by a number of important players in what was
already an unusu- ally thin market. Similar outcomes were
observed in the 1974 crisis as a result of export restrictions on
soybeans, wheat, rice, and fertilizers. The tragedy of these
restrictions is that they ef- fectively sacrifice international
Source: Price data are from USDA (2008d). price stability for the sake of domestic price stability, as
Fig. 2. The effect of export restrictions on rice Johnson (1975) noted after the 1974 crisis.
prices. Weather shocks offer another commodity-specific explana-
tion of price rises, the commodity in question being wheat.
are unlikely to be a leading cause of the overall price surge, Most spectacularly, Australian wheat production in 2006 was
since 50–60% below trend growth rates in two successive years
there is little evidence that these markets significantly (2005–2006). The United States also experienced a poor har-
influence vest, some 14% lower than the previous year, and there were
“real” supply and demand factors. more modest declines in Russian and Ukrainian production.
Next are a series of commodity-specific factors that proba- But a closer inspection of the data suggests that this
bly played some role in increasing the prices of the three or intuitively attractive explanation is not as convincing as it
four commodities in question (rice, wheat, maize, soybeans). first appears. The main problem is that annual production
For rice, in particular, export restrictions are a very shortfalls are a normal occurrence in agricultural production
compelling explanation because of the number of important and in wheat pro- duction in particular. Global wheat
exporting coun- tries that imposed restrictions, and because production declined by 5% in 2006/2007, but it also declined
rice is much more thinly traded relative to other staples, with by 11% in 2000/2001 and 6% in 1993/1994. The U.S. wheat
only around 7% of global production being traded over the production fell by bigger margins in 1991/1992 (27%),
last five years (USDA, 2001/2002 (13%), and 2002/2003 (18%), and a closer
2008c). 5 Looking more closely at the timing of export restric- inspection of Australia’s wheat production since
tions and rice price increases is also suggestive of causality 1990 shows a number of other years when harvests were well
(Fig. 2). From August 2005 until November 2007 rice prices below trend: 51% in 2002, and three years from 1993 to 1995
increased steadily but significantly, by about 50% (in real when the shortfalls varied from 50% to 100%. Moreover, de-
terms) from an all time trough in 2005. In November of 2007 clines in output in several countries in 2007 were offset by
India im- posed the first major export restriction, perhaps large crops in Argentina, Kazakhstan, Russia, and the United
because India has not keep large stocks relative to its high States, whose wheat exports increased by around 13% (or an
levels of consump- tion and volatile production patterns. In additional
any event this appears to have been the turning point for rice 7.5 million mt) from 2006. So overall, global grain production
prices. From Novem- ber 2007 to May 2008 rice prices did decline by 1.3% in 2006, but it then increased 4.7% in
increased by 140%, despite production reaching an all time 2007. At best, then, these rather minimal shocks must have
high in 2007, the complete ab- sence of any significant significantly interacted with other events, such as much lower
increase in demand, and fairly stable rice stocks, with the buffer stocks (see below) or increased market sensitivity. But
exception of nontrading China. In early in that case the deeper causes ultimately lie elsewhere, not in
2008, panic ensued as the rise in other commodity prices the vagaries of the weather.
began to attract much more concern in Asian markets. This For maize, some oilseeds, and soybeans, increased biofu-
5 els production offers a strong explanation of rapidly
Export bans for other commodities probably also made matters worse
(e.g., soybeans in Argentina, wheat in Kazakhstan), but prices of these
increasing prices across a number of different commodities,
commodities had already risen significantly before the bans were in place, especially once one considers substitution effects. Once oil
and the largest producers of other important grains did not engage in export prices top $60 a barrel biofuels became substantially more
bans. Moreover, whereas only about 7% of rice production is traded, over 12% competitive against oil, such that it is the surge in oil prices
of corn production is traded, and over 18% of wheat production is traded, so
that appears to have prompted the surge in biofuels demand
markets for these commodities are much thicker.
(Schmidhuber, 2006). Moreover, most analyses to date
380 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375–
391
Mitchell, 2008; Schnepf, 2008; von Braun et al., 2008). This 2008). 8 So biofuels holds some distinction in that it strongly
is because: (a) the use of maize for ethanol grew especially ac- counts for maize prices, in particular, but can also explain
rapidly from 2004 to 2007, such that the ethanol industry used price rises in other staples (although doubts have been
70% of the increase in global maize production over that expressed about how realistic these sizeable substation effects
period; (b) the United States is the largest producer of ethanol are; see Abbott et al., 2008).
from maize and is expected to use about 81 million tons for The remaining explanations—oil prices, global macroeco-
ethanol in the 2007/2008 crop year (USDA, 2008a); (c) the nomic phenomena, and declining stocks—are even less crop-
U.S. ac- counts for about one-third of global maize production specific. Relative to its output, agriculture does not use that
and two- thirds of global exports (Mitchell, 2008); (d) much energy, but several facts suggest oil probably has a
European biofuel production is more concentrated on large impact on the costs of agricultural production (see
biodiesels that use about Table 3, and Appendix A in Headey and Fan, 2008). First,
7% of global vegetable oil supplies for biodiesel (amounting the energy used in agricultural production is mostly oil-
to about one-third of the increase in vegetable oil related, and oil prices have risen faster than prices of other
consumption from 2004 to 2007); and (e) biofuel production energy sources (Table 1). Moreover, U.S. food production—
in other parts of the world is either relatively small, or uses which dominates world food production and export markets
different crops (e.g., sugarcane in Brazil), which have not —is especially oil- intensive. Second, oil prices affect the
experienced price surges. As for impacts, increased maize prices of fertilizers, as well as other chemicals used in crop
production (and to a lesser ex- tent oilseed production) has production. For wheat and corn, fertilizer prices alone
had strong knock-on effects to other foods. In the United account for over a third of total operating costs and 15–20%
States, rapid expansion of maize area by of total costs. Factoring in rising costs of fuel, fertilizers, and
23% in 2007 resulted in a 16% decline in soybean area, which other oil-related farm pro- ductions, we estimate that oil
reduced soybean production and contributed to the 75% rise prices increased the costs of U.S. production of corn, wheat,
in soybean prices from April 2007 to April 2008 (Mitchell, and soybeans by 30–40% over
2008). In Europe, other oilseeds displaced wheat for the same 2001–2007 relative to a baseline scenario in which oil-related
reason. Another knock-on effect of significant concern is that prices only increased by the inflation of the U.S. GDP deflator
biofu- els have contributed to substantially depleting grain (Table 3). 9 These fuel-based cost increases are about 8% of
stocks, especially in the United States (see Fig. 4 in corn price increases, 11% of soybean price increases, and
Helbling et al., about
2008). 6 20% of wheat price increases. Finally, oil prices also affect
A range of more formal modeling exercises also suggest transport costs, such that the margin between domestic and
sig- nificant impacts of biofuels on grain prices, even though ex- port prices has added as much as 10.2% to the export
these simulations vary substantially in terms of time periods prices of corn and wheat (Mitchell, 2008). Hence, the
consid- ered, prices used (export, import, wholesale, retail), combined in- crease in production and transport costs for the
coverage of food products, the currency in which prices are major U.S. food commodities—corn, soybeans, and wheat—
expressed, and whether prices are real or nominal (Schnepf, could account for 20–30% of the increase in U.S. export
2008). 7 The more rigorous methodologies suggest that prices (Mitchell,
biofuels accounts for 60–70% of the increase in corn prices 2008). 10
and maybe 40% of soybean price increases (Collins, 2008; A second commodity-wide explanation of surging prices is
Lipsky, 2008), while Rosegrant et al. (2008) find that the the depreciation of the USD over the last six years, especially
long-term impact of ac- celerated biofuel production on against the Euro. The depreciation of the USD can clearly ac-
maize prices is about 47%. This model also finds strong count for the rise in dollar-denominated food prices in an
substitution effects on wheat and rice price, with price arith- metical sense, cutting off 20–30% of the nominal dollar
increases of 26% and 25%, respectively (using Schnepf’s 8
The role of biofuel policies is beyond the scope of this review, but readers
are referred to reviews by Schnepf (2008) and Abbott et al. (2008). The latter
also offers a critical appraisal of some of these simulations, but even so,
6 shocks of this magnitude are a compelling explanation of rapid price rises in
Mitchell estimates that had vegetable oil areas for biodiesel been used for
wheat production then European wheat stocks would have been almost as several commodities, and reasonably significant substitution effects across
large in 2007 as they were in 2001, rather than lower by almost half (although others.
9
it is not clear that in the absence of biofuel production farmers would increase Mitchell (2008) uses different assumptions to find that the production-
harvest areas devoted to wheat). weighted average increase in the cost of production due to these energy-
7
General equilibrium models generate long-term price impacts resulting intensive inputs for maize, wheat, and soybeans was 11.5% between 2002
from and 2007. However, he deflates yields by 2002, which was a poor harvest in
specific shocks by factoring in interactions between markets, but their ability the United States, and does not distinguish between total costs. See Headey
to capture short-term price dynamics is highly constrained. Conversely, and Fan (2008).
10
detailed studies of specific crops may include the short-term dynamics, but Of course, these are not very sophisticated estimates as they do not utilize
often exclude the impact on other markets. There are also issues as to supply and demand elasticities, which influence the degree to which
whether shocks are considered to be independent (Schnepf, 2008). increased production costs affect supply responses and market prices.
 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375– 381
391
Table 3 however. One inconsistency is that agricultural inventories
The estimated impact of fuel-related costs on U.S. farming costs, 2001– are
2007
Corn Soybeans Wheat not high, but low (see the discussion below). Moreover, the
diversion of assets from treasury bills and the like to
(1) Yield gap, 2001–2007 0.9 0.9 1.0
(2) Projected costs in 2007 with 2001 cost 325.1 225.6 180.1
commodi- ties may have influenced agricultural futures
levels extrapolated to 2007 via the U.S. prices, but as we noted above, the jury is still out as to
GDP deflator whether that constitutes a substantial effect on spot prices.
(3) Actual total costs in 2007 453.5 295.4 235.7 What about the decline in stocks, then, which influence
(4) Difference = (3) − (2)
39.5 30.9 30.9 price volatility by determining the stability of supply? This
(5) Difference deflated by yield growth =
35.5 27.8 27.8
(4) × (1)
might constitute a crop-specific explanation, but it so
(6) Percentage
∗ change in prices received by 132.6 99.0 101.7 happens that stocks have declined for maize, wheat, and rice,
farmers often below the FAO (1983) benchmark of 17–18% of total
(7) Oil-related cost increase as percentage of 8.0 11.0 20.3 consumption that is predicted to substantially stabilize prices
total price increase paid to farmers =
(5)/(6) and consump- tion (see Table A1 in our Appendix). 12 So
recent data and strong historical covariance between prices
Notes: Authors’ calculations from USDA (USDA, 2008b) and stocks super- ficially suggest that stock declines could
data.
∗ substantially account for recent price movements. However,
The percentage change in prices uses actual prices received by farmers
for 2000/2001, and actual prices received by farmers in 2006 multiplied by
there are some signif- icant caveats to this conclusion. Most
the percentage change in U.S. export prices, since actual prices received importantly, declining stocks might simply reflect increased
by farmers in 2007 are not yet available. If farmers received less than the demand or reduced pro- duction levels. Biofuels offer a
full U.S. export price change from 2006 to 2007, then row (7) is promising explanation of de- clines in maize stocks (see
above), and bad weather, stagnating production growth, and
exports (particularly grain and oilseeds) also increase, ceteris low prices seem to account for the almost pervasive decline
paribus. Using USDA’s agricultural trade-weighted index of in wheat stocks (although unexpect- edly, wheat stocks have
real foreign currency per unit of deflated dollars, Abbott et al risen in Australia). For the stocks story to be causally
find that from 2002 to 2007 the dollar depreciated 22%, and interesting there must therefore be a role for exogenous
the value of agricultural exports increased 54%. Assuming policy decisions, or other forces, to have reduced stocks.
that the United States is a large country in international Three such explanations are possible. First, it may be that
agricultural markets—which it certainly is in wheat, corn, and stocks were so high prior to 2000, and prices so low, that
soybeans— depreciation of the USD should lead to higher there appeared to be a need to reduce stocks. Second, the
prices in the United States, but lower prices in the rest of the increasing use of just-in-time inventory systems may have led
world. Previous research has indicated that a depreciation of to lower stocks. These two explanations are plausible but
the dollar increases dollar-denominated commodity prices generally dif- ficult to prove. One exception is the explicit
with an elasticity of be- tween 0.5 and 1.0 (Gilbert, 1989). policy decision made by China to reduce stocks of major
Mitchell (2008) therefore calculates that the depreciation of cereals, which were inefficiently high in the 1990s. But why
the dollar has increased food prices by around 20%, assuming China’s stocks should have had any direct effect on
an elasticity of 0.75. Abbott et al. (2008) also show that in the international prices is difficult to fathom (unless market
current crisis the divergence between the dollar and many actors irrationally took heed of these declines), since China is
(but not all) other currencies is quite stark compared to self-sufficient in major grains. Indeed, netting out China from
previous increases in nominal dollar- denominated food price global stocks trends turns out to be very important (see Table
increases (e.g., 1995/1996). A1). World stocks for maize, for example, declined from 26%
Another theory that has been advanced in some quarters is of usage over 1990–2000 to just 14% of consumption from
that low real interest rates, especially in the United States, 2005 to 2008, but excluding China from the global figures
have caused a general price increase in a wide range of suggests that world stocks remained the same over the two
commodi- ties (for a discussion of the theory, see Frankel, periods, at just 12%. Nevertheless, a large number of major
1984). 11 Low interest rates increase the demand for storable producing and exporting countries did incur substan- tial
commodities, increase firms’ desire to carry inventories, and stock declines in recent years.
encourage spec- ulators to shift out of treasury bills and into All in all, our conclusion is that stock declines are
commodity con- tracts. All three mechanisms work to consistent with rising prices, but are not as causally
increase the market price of commodities, in what is often
12
known as “carry trade.” How consistent this explanation is However, one clearly needs to distinguish between optimal stocks for
coun- tries that predominantly consume staples, and countries that
11
Frankel is also the main proponent of this theory as an explanation of predominantly ex- port staples. The latter type of country generally has little
the current crisis. Several discussions can be found on his website at: http:// interest in keeping reserves in excess of the “carryover” stocks designed to
content.ksg.harvard.edu/blog/jeff frankels weblog/ ensure steady supply of staples to its export destinations.
382 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375–
391
Cross-cutting
Demand factors for which
for biofuels evidence of
causality is weak:

Corn Decline
Oilseed
prices in
prices
stocks

Export Oil prices↑ Asian Low

restrictions $US↓ demand interest
rates

Rice Wheat Financial

prices prices speculatio
n

Weather
shocks

Notes: Authors’ construction. Boxes in gray denote weaker, crop-specific causes. The decline of
the USD and the rise in oil prices are shown together because they are both universal factors,
and because they may be causally related to each other.
Fig. 3. A summary model of the principal causes of the crisis: a near-perfect storm.

deeper causes, and partly because what effects they do have rises—suggest that the recent surge in food prices will have a
on se-
prices are enacted through interactions with other factors vere impact on the poorer populations of the world, perhaps
(e.g., exacerbating shocks). It is also possible that excessively even throwing more than 100 million people into poverty
high stocks in the 1990s (and before the 1974 crisis) were (Ivanic and Martin, 2008; World Bank, 2008). These
actually an underlying cause of the crisis: the use of stocks to predictions, however, require closer examination, and often
satisfy increasing demand may have delayed price rises that significant qualification. The group most vulnerable to rising
would otherwise have provided a stronger signal of rising food prices is generally the urban poor, but this group is also
demand. A policy implication of this is that it is not far more vociferous than the rural poor (Bezemer and Headey,
altogether clear that increasing stocks once more would 2008). Thus, protests may be evidence of suffering, but not of
prevent further food crises. net suffering: price changes always create winners and losers,
and judging who is who re- quires accurate data and careful
2.3. A simple model of the 2005–2008 food crisis
analysis at both the macro- and microlevel. In Fig. 4 we
depict eight steps through which international prices influence
The analysis above indicates that some of the proposed ex-
households, with pertinent policy questions listed in gray
planations of the food crisis are more convincing than others.
outside each box. Most macroeconomic studies focus on the
Two or three factors offer convincing commodity-wide
areas listed in boxes 1 through 4 (a few focus on substitution
expla- nations of rising prices, although declining stocks, low
effects of box 5), and most microeco- nomic studies focus on
interest rates, and financial speculation are less well
boxes 6 through 8. This dichotomy is unfortunate, because it
documented and less theoretically convincing than oil
is by no means clear that countries that are vulnerable in a
prices, depreciation of the USD, and biofuels. In addition,
microeconomic sense (i.e., high rates of poverty and hunger),
several explanations of- fer commodity-specific
are automatically vulnerable in a macroe- conomic sense
explanations, although these too vary between the highly
(high import bills, low reserves, high rates of transmission),
convincing (export restrictions on rice) to somewhat less
and vice versa. In this section, we will attempt to bridge the
convincing explanations (weather shocks). There are,
disparate findings of different studies and different data as
moreover, some complex interactions between these factors
best we can, and provide some conceptual analysis of the
that generally reinforce each other, in what the director of the
WFP has called “a perfect storm.” We therefore conclude this 3.1. Macroeconomic impacts
section by outlining a model that we believe broadly captures
the main causal mechanisms of the current crisis (Fig. 3). 3.1.1. Import bills
Many recent impact studies refer solely to food prices, but
3. The consequences of the crisis any comprehensive assessment of current poverty trends
needs to incorporate changes in a range of prices, including
A number of factors—food riots, export restrictions, depen- fuel costs and fertilizers. Oil prices, in particular, will have a
dency on food imports, the persistency of food, and oil price pervasive effect on a country’s vulnerability to the current
crisis through
 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375– 383
391
Are fuel, 1. Size of food 8. Levels of Are many
fertilizer & fuel households
income and
& transport costs import bills nutrition vulnerable? Is there
also a burden? social protection?

Are price rises 2. 7. Net food Is urban poverty high?

small in local Exchange buyers vs. Is there access to
currency rate net food land?
terms? movements Are yields high?
sellers

Does the country 3. 6. Pattern of Are diets diverse? Are

have adequate Foreign food people dependent
exchange upon consumption of
export earnings? consumption
reserves tradable cereals?

Is there scope to 4. Trade 5. Substitution Are there marketing

mitigate price rises & effects on policies which
via policy reforms? marketing local food dampen price
policies prices volatility?
Notes: Authors’ construction.
Fig. 4. The transmission from international markets to household
welfare.

their impact on exchange rates, foreign reserves, transport oil prices—as a greater macroeconomic threat to the devel-
costs, oping countries. Indeed, oil imports are 2.5 times larger than
and domestic inflation. For these reasons the most relevant food imports for low-income countries and twice as large for
macroeconomic assessments of the crisis incorporate the ef- middle-income countries, so the impact of commensurate
fects of rising oil prices as well. Particularly useful in this price increases is much greater for oil, as Table 3 confirms
regard is a recent IMF (2008a) assessment of import bill (IMF,
based on net import positions with respect to food, oil, and 2008a).
other commodities.
As for food imports in particular, the dependency of the 3.1.2. Exchange rate movements and foreign reserves
LDCs on food imports has attracted considerable attention The next two components of food price impacts—exchange
since the crisis began, but it is a question that merits closer rate movements and foreign reserves—are best discussed
inspection. 13 jointly since the two are causally linked. As noted in Section
Ng and Aksoy (2008) recalculate net food imports, but disag- 2, a number of currencies have appreciated against the USD,
gregate their outcomes by oil exporters, conflict states, small but by no means all. The distribution of nominal
islanders, and “normal” countries. They find that a typical appreciations is bipolar, with one pole representing the Euro
“nor- mal” low- and middle-income country has gone from countries and the West African CFA France zone (which is
being a net food importer in 1980/1981 to being a net food pegged to the Euro) whose common currency has appreciated
exporter in 2004/2005. Moreover, only six low-income by some 80% over this period, and a second pole denoting the
countries have food deficits that are more than 10% of their Central American and Caribbean, which includes countries
imports. The main exceptions to these conclusions are formally and informally pegged to the USD. Real exchange
African countries, which tend to have a heavier reliance on rate movements—from a somewhat small sample of countries
cash crop production. As for oil producers, their terms of —are still centered around a positive mean, but the
trade (TOT) and reserve sta- tus have improved so much in distribution is slightly less bimodal. The main message of Fig.
recent years that they should be less vulnerable to rising 5 is that movements against the USD have generally been
food prices in a purely macroeco- nomic sense. Net exporters positive, but still varied substantially, especially across
of other minerals have also benefited (e.g., Zambia, developing regions.
Mozambique), albeit to a lesser degree, as have countries that These variations—along with dependence on food/cereal
are net exporters of labor to oil producing coun- tries (South imports—will significantly determine the degree of macroe-
Asian countries, Philippines) (Rosen and Shapouri, conomic transmission of rising USD-denominated prices.
2008). Con- sider, for example, a Central American or Caribbean
country that is formally or loosely pegged to the USD. This
13
The FAO classify 82 developing countries as low-income food-deficit country’s exchange rate will generally have appreciated
coun- tries (LIFDC), largely based on the idea that national food demand against the Euro and other currencies, making the possibility
exceeds production. Gu¨ rkan et al. (2003) also calculate food import bills
from 1970 to
of finding cheaper imports from outside the United States
2001 and find that developing countries have become more dependent upon unlikely (especially once transport and other transaction costs
food imports for consumption. are factored in). Moreover, variations in trade patterns
384 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375–
391
28 28

Panel A: Panel
24 24
Nominal B: Real
20 20

16 16

12 12

8 8

4 4

0 0
-60 -40 -20 0 20 40 60 80 100 120 -20 -10 0 10 20 30 40 50 60 70 80 90

Notes: Panel A: Authors’ calculations from IMF (2008b) data covering 124 countries. Panel B: Authors’ calculations from USDA
(USDA, 2008c) data covering 95 countries.
Fig. 5. Exchange rate appreciations against the USD: Q1-2002 to Q2-2008.

exchange reserves for countries, so limited trade with non- on food prices in developing countries. A few recent studies
U.S. have examined price transmission in selected countries or re-
countries also limits the foreign exchange capacity of such a gions, but so far very little in the way of a big picture has
country. Since the United States is the only highly dominant emerged. 15 One recent FAO study on the current crisis rean-
cereal exporter in the world, it is therefore worth investigat- alyzes the extent of price transmission in seven large Asian
ing the relationship between dependency on U.S. food imports countries from the fourth quarter of 2003 to the fourth quar-
and exchange rate movements against the USD (see Appendix ter of 2007 (Dawe, 2008), a period which admittedly does
Table A2). Unsurprisingly, such an analysis suggests that the not capture the full international price increase, especially in
regions that are most dependent on the United States as a rice. Overall transmission—measured as the ratio of LCU-
source of food imports are Central America, the Caribbean, denominated retail price changes to USD-denominated export
and some of the more northern countries of South America. A prices—varied considerably among the seven countries. In In-
few other countries and regions are fairly dependent on the dia, the Philippines, and Vietnam, the pass through was just
United States for food imports, but many such countries are 6–11%, but in the remaining countries it was 41–65%.
either wealthy or experienced large real appreciations against Interest- ingly, movements in the real exchange rate explain
the USD (e.g., Nigeria). 14 more than half of the price difference between USD-
As for foreign exchange reserves, the IMF has calculated denominated export prices and LCU-denominated local
months of imports as of 2008. Disconcertingly, the Caribbean currencies, the main excep- tion being Bangladesh. 16 Dawe
and Central American countries also look highly vulnerable also found that transmission of wheat prices appeared to be
in this dimension as well, although South American countries partial in India and Indonesia, but fully transmitted in
generally seem somewhat better off. In Africa, there is some Bangladesh. Some of the impacts of food price increases on
dis- crepancy between oil exporters (generally with large inflation in Asian countries are also estimated by the ADB
reserves) and nonoil exporters (with smaller reserves), so few (2008), while some recent data on in- ternational price
general- izations can be made, and many countries have changes (U.S., Thailand, and South African markets) and
sufficiently low reserves to warrant concern. The same is domestic price changes for African countries are
true of Asia. Of greatest concern is that rising oil prices will 15
eat up foreign exchange reserves (Table 3), leaving only On commodity-specific price transmissions, historical evidence certainly
suggests that these will probably vary considerably over commodities, over
scarce reserves left for food imports. regions and over time, but are generally lower than one might expect a priori
3.1.3. Transmission in domestic markets and the impact (see Baffes and Gardner, 2003; Conforti, 2004; Sharma, 1996, 2002).
However, previous studies offer little specific guidance as to the overall
on inflation transmission of international prices to particular countries because of context-
Despite reasonable data on export prices, exchange rates, specific circum- stances (e.g., exchange rate movements, rising oil prices).
and import dependency, very little up-to-date data are 16
In an update for 2008, Dawe also found that Bangladeshi wholesale prices
available rose by 29% from December 2007 to March 2008, Philippino prices
14 increased by 25% from February to early April 2008, Indian prices rose 18%
A complementary pattern in the data relates to corn and wheat exports.
The USDA’s trade-weighted real exchange rate index for corn—which is from October
mostly exported to Latin America —fell by just over 4%, from January 2005 2007 to March 2008, and Thai prices increased by 17% from January 2008 to
to July February 2008. As of the middle of March, wholesale prices in both China
2008, while the analogous index for wheat fell by almost 19%. and Indonesia had remained relatively stable.
 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375– 385
391
Table 4 Because of the limited time frame of the data in Table 5
Number of countries affected by food and oil price (the data only cover 2007 and the first few months of 2008),
increases
Low income Middle income Fig. 6 looks at inflation from 2005 to July 2008 (although
Countries with severe negative
in some cases the data terminate in May or June). Our basic
shocks:1 48 33 strategy in Fig. 6 is to group data by smaller regions and
Oil price shock 13 3 extract countries from those regions that constitute outliers. In
Food price shock 42 30 one case we also look at five mineral exporters in Africa. The
Combined shock data tell an interesting story by appearing to confirm some of
Countries with positive shocks:2 11 23 the conjec- tures made earlier. First, prices have risen most
Oil price shock 30 28 quickly in three countries in which domestic factors (weather
Food price shock 23 23
Combined shock
shocks and/or conflict) have also contributed substantially to
Countries with less-than-adequate reserves: price increases: Myanmar, Ethiopia, and Kenya. Ghana is also
Before the shocks 30 18
After the oil price increase 37 26
something of an outlier, but it is also a country in which
After the food price increase 27 19 transmission of ris- ing international prices could not be the
After the combined shock 37 25 whole story. Although Ghana imports wheat, rice and some
Total countries 74 71 maize, Ghanaian diets are diverse, and the Ghanaian currency
Notes: 1 drop in reserves larger than 0.5 months of imports. 2 shock results has appreciated against the dollar (a combination of higher oil
in an increase in reserves. prices, large remittances, and increased government spending
Source: IMF (2008b). are usually blamed for Ghana’s inflation). Yemen is perhaps
a more conventional example of a country being vulnerable
to rising prices, since it is heavily dependent upon food
presented in Appendix C of Headey and Fan (2008). While imports.
that data need to be interpreted with great care because of As for the other groups, five mineral exporters have also
the lack of a suitable price deflator, the data generally sug- ex- perienced high inflation, but this is surely due in large
gest that commodity-specific price transmission in Africa has part to increased export earnings and Dutch Disease. Nonfood
thus far been limited, the main exception being Ethiopia (see infla- tion in Nigeria, for example, appears to have surpassed
Ulimwengu et al., 2008). 17 food inflation. South Asia also experienced accelerated
As for a broader picture of price changes, more compre- inflation due to a mix of dependency on oil imports,
hensive but less detailed data can be obtained by examining dependence on rice, limited exchange rate movements
recent inflation trends, such as data on food inflation and to- (especially Bangladesh), and domestic factors. Several
tal inflation presented by the World Bank (2008) for 2007 and Central Asian countries have expe- rienced rapid inflation,
early 2008. In Table 5, we present that data by regions and although mineral exports and Dutch Disease may well be a
use it to calculate nonfood inflation based on estimates of story here too. Central America and the low-income
house- hold food expenditure shares (Column 3). We then Caribbean countries have also experienced fairly high
calculate the difference between food and nonfood inflation inflation, as expected. As for the other groups, the main story
as a mea- sure of relative price change (Column 4). Among is that inflation has averaged around 6–8% per annum in most
these pat- terns we find that food inflation is high in all African countries. West Africa—a region largely tied to the
regions, varying from around 9.5% to 18%. However, this in Euro—has the lowest inflation of all the regions sampled. So
itself is not in- dicative of real or relative prices changes. although many African countries are highly vulnerable in a
Column 4 shows the differential that can be thought of as microeconomic sense—poverty and hunger rates are high, and
the change in the TOT for food. On average, food inflation many Africans seem to be net food buyers—it is not obvious
has outpaced non- food inflation at a faster rate outside of that actual price rises have thus had a major impact in most of
Africa than it has in Africa. 18 Africa.
Against these relatively optimistic conclusions we should
17
Ethiopia’s example is instructive, however, because it illustrates that the make some important caveats. First, the buffer to larger price
term “transmission” can be somewhat misleading insofar as domestic factors transmissions that has been provided by the depreciation of
can both depress transmission (as with rice in Asia), but also accelerate the USD over the past few years is not a permanent one.
domestic price changes. Quite rapid price accelerations in Ethiopia, and also Several important currencies, including the Euro, are now
Kenya, are substantially a consequence of domestic factors (drought and
domestic policies in Ethiopia, drought and conflict in Kenya).
considered by many to be highly overvalued, perhaps
18
We have confirmed the statistical significance of the difference between indicating that the dollar may strengthen in the near future,
Africa terms of trade trends and other regions with t-tests for differences in thus leading to faster price transmissions in regions such as
means, although it is still important to note that there is substantial variation West Africa.
within this African sample, which is also relatively small (12 countries). So Second, price transmission may be low because of costly
with caution we might say that the effects within Africa, easily the poorest
developing region, have so far been limited.
government policies aimed at dampening price rises. The
World Bank (2008) provides data indicating that some 84
386 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375–
391
Table 5
Food inflation, total inflation, and estimates of trends in the TOT:
2007/2008
Region (sample size) (1) (2) (3) (4) (5)
∗
Total Food inflation Nonfood inflation TOTfood = (2)– Std. dev. of
inflation (3) TOTfood
South Asia (5) 11.1 15.1 5.9 8.0 11.4
East Asia (8) 5.9 10.1 0.8 8.4 7.8
Sub-Saharan Africa (12) 7.9 9.5 6.1 3.0 8.2
Middle East & N. Africa (4) 6.6 9.4 2.4 5.7 2.3
C. America & Caribbean (11) 9.0 13.1 5.6 8.2 7.1
S. America (8) 6.4 11.4 2.7 10.0 6.0
E. Europe & C. Asia (9) 14.0 18.2 7.1 8.4 9.3
Small Islands (3) 8.3 15.7 0.6 14.8 12.6

Source: World Bank (2008) for total and food inflation data, with authors’ own estimates of nonfood inflation based on FAO data on food expenditures shares
from
http://www.fao.org/faostat/foodsecurity/index_en.htm.
∗
Notes: Nonfood inflation is calculated with estimates of the share of food in total household expenditure, which were derived from a regression of sample food
expen-

Source: IMF (2008b).

Notes: Inflation is calculated until July 2008 wherever possible, although in many cases data
were only available up to May or June, and in a few cases (Pacific Islands and middle-income
Caribbean) only March or April. #The five mineral exporters are Nigeria, Zambia, Botswana,
∗
Angola, Sierra Leone (the latter is only a moderate exporter, however). Indicates that the
regional
group excludes any counties that are listed individually or in the mineral exporter category; for
example, West and Central Africa excludes Nigeria, Ghana, and Sierra Leone and East Africa
excludes Kenya and Ethiopia.
.
Fig. 6. Average annual CPI inflation from January 2005 to July 2008.

the fiscal cost of these actions for both food and fuel. In many noted after the 1974 crisis, volatile food prices are a problem
instances, these taxes and subsidies transfer the burden of because of the inability of the poor to smooth their consump-
rising prices from the market to the government’s coffer, on tion via capital markets. Insofar as governments have better
average adding at least one percentage point to budget deficits access to capital markets than the poor, government policies
(% GDP) (or otherwise require cutback in other expenditures that transfer the burden of rising international food prices to
that may also be important for the poor, at least in the longer fiscal deficits may be preferable to allowing full price trans-
run—for example, expenditure, health, agricultural mission. The second issue, of course, is the distributional im-
investment). Whether it is better to absorb international price plications of each of these tax and transfer programs (e.g., see
rises through these taxes, subsidies, or export restrictions is a Essama-Nssah, 2008, for a conceptual analysis and review,
complicated calculus that is beyond the scope of the present and Arndt et al., 2008, for an application to rising food prices
analysis, but certainly an issue worthy of further study. As in Mozambique).
Valdes and Siamwalla (1981)
 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375– 387
391
A final caveat is that the full transmission of international study only looks at the short-run impacts by precluding
prices may take some time. Some of the transmission mecha- signifi-
nisms are quite complex. Food prices can be directly cant behavioral responses by producers and consumers of
imported, but producers of tradable foods (or exporters of food, or significant partial or general equilibrium effects on
food) can also experience rising prices. In some cases, such as prices in other sectors. All four studies explicitly
Uganda, a coun- try may not be directly vulnerable because of acknowledge this, and the Martin and Ivanic and Zezza et al.
diverse diets and production systems, but rising prices in (2008) studies also calculate some partial equilibrium effects
neighboring countries (e.g., Kenya) can create opportunities on household income as robustness tests, although neither
for trade that put pressure on domestic prices (Benson, 2008). find significantly different findings, except some
Moreover, some regions within a country—especially rural redistribution of negative impacts from rural to urban
regions—may be more iso- lated from international price households in the case of Ivanic and Martin’s unskilled wage
rises than urban areas because of high transport costs effects. Nevertheless, there could be other be- havioral
(Codjoe et al., 2008; Ulimwengu et al., responses to rising food prices, even in the short run. For
2008). All of these complexities point to the need for research example, many poor households have diversified income
that combines both detailed macro- and microeconomic sources and may have substantial scope to increase farm-
analy- sis (e.g., Arndt et al., 2008). based activities as food prices rise.
Finally, the main methodological framework of each study
3.2. Microeconomic vulnerability to rising food
prices is relatively similar in following Deaton’s (1989) approach.
Essentially, the welfare effect of rising food prices at the
Given that we know so little, at a cross-country level at
least, urban, rural, or country level depends upon the number of
people who are poor and vulnerable (just above the poverty
about the extent of food price changes or the costliness of
line), whether those people are net buyers or net sellers of
poli- cies aimed at mitigating price rises, it should be no
food, and whether they are marginal net sellers/buyers or
surprise that we know even less about the impacts of rising
significantly so. Such a calculus leads to some nuanced
prices on poverty. What we do know from the cross-country
expectations of which groups might be expected to suffer
poverty simulations so far—namely, Ivanic and Martin’s
most from rising prices. On the one hand urban populations
(2008) nine-country study, Zezza et al.’s (2008) 11-country
have large numbers of net buyers of food, but they also tend
study, Wodon et al.’s (2008) study of 12 West African
to be better off than the rural population. Moreover, rural
countries, and Dessus et al.’s (2008) study of the urban sector
populations might also contain surprisingly large numbers of
of 73 developing countries—is what the likely impacts on
net food buyers because of the prevalence of nonfarm
poverty would be, given price changes. In effect, then, these
workers, cash crop production, low productivity food
simulations tell us who would be vulner- able to rising prices,
production, or landlessness (Ahmed et al., 2007). A somewhat
but not which populations are actually experiencing hardship
surprising insight of Ivanic and Martin’s study, for example,
as a result of rising food prices, because none of these
is that rural poverty increases by more than urban poverty in
experiments incorporate actual price changes. As we saw
two of the three African countries surveyed. In Zambia rural
above, changes in food prices are likely to vary substantially
poverty increases by three times as much as urban poverty,
across countries, whereas these studies assume common price
even though initial poverty rates were roughly the same in
changes across countries. Nevertheless, these studies are
rural and urban areas (of course, poverty rates do not capture
methodologically insightful, and empirically useful for
the number of people who are vulnerable).
identifying vulnerability to price changes across countries and
The large effects on rural poverty that result from these
subnational groups (e.g., rural and urban). All three studies
simulations seem somewhat at odds both with prior intuitions
can also tell us about the incidence of poverty changes
and other evidence on these issues. Aksoy and Isik-Dikmelik
(poverty headcounts) as well the extent of changes (e.g.,
(2008), for example, analyze some of the same surveys as
poverty gaps). Indeed, the Wodon et al. (2008) and Ivanic and
Ivanic and Martin, but conclude that: (a) although most poor
Martin (2008) studies have been particularly influential in
house- holds are net food buyers, almost 50% are marginal
framing World Bank responses to the crisis (World Bank,
net buyers; and (b) net buyers typically have higher average
2008) and catalyzing sup- port from other institutions.
incomes than net food sellers in eight of the nine countries.
These four studies also make a useful comparison because
Another par- tial explanation of large changes in rural
all three use quite recent microeconomic surveys, as well as
similar simulation methods. These similarities are as follows. poverty may be that household surveys have some tendency
First, all four papers look at real food price changes, but not at to underestimate the degree to which households are net
oil or fer- tilizer prices, even though rising oil prices, in
accounting matrix multiplier approach, and find that indirect effects are
19 signif-
Arndt et al.’s (2008) study of Mozambique, for example, finds that ris-
ing fuel prices lead much larger increases in poverty than rising food prices, icantly larger for oil than for food in three of eight countries sampled.
20
and Passa Orio and Wodon (2008) estimate the longer term impact of specific We thank Xinshen Diao for this astute comment. The specific argument
commodity price spikes on the price of other commodities through a social is that the consumption side of micro surveys is more regularly updated,
whereas production, being largely seasonal, is only measured at distant
388 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375–
391
household income in rural regions may not be as well mea- to a broader audience and focused considerable attention back
sured as it is urban regions. So it is possible that certain on to the fundamental roles which food production and food
survey biases are also influencing the outcomes of these security play in both current welfare and in the longer run
simulations, although we do not have any clear idea of the pro- cess of development. Despite the political constraints of
strength of these biases. the time, the 1974 crisis produced and bolstered a number of
A final issue relates to the diversity of microeconomic vul- new institutions—the WFP, IFAD, the CGIAR, GEIWS—that
nerability across countries. Clearly there are a range of factors have mostly been successful in improving food security and
that influence the vulnerability of households to rising food rais- ing agricultural productivity (Headey and Raszap
prices within and across countries (Fig. 4). Zezza et al. (2008) Skorbiansky,
go further than the other simulation studies by disaggregating 2008). But at the same time international policymakers, then
vulnerability across groups and explaining vulnerability mea- and now, have failed to address the most fundamental
sures with OLS regressions. Across 13 developing countries deficien- cies of the global food system, including low levels
from across the developing world, they find that the most vul- of agri- cultural investment and agricultural aid (Bezemer and
nerable households are: urban or rural nonfarm, larger, less Headey,
educated, more dependent on female labor, less well served 2008), and excessive reliance on the reserve systems of major
by infrastructure, and, within the rural sector, households with grain producers as a distant Second Best alternative to freer
limited access to land and modern agricultural inputs. All of trade.
these findings are fairly intuitive, but it is still useful to see The international policy-making community has an obliga-
mi- croeconomic evidence confirming these intuitions and tion and a mandate to redress a 30-year complacency toward
offering orders of magnitude as to which household attributes these issues (von Braun et al., 2008), yet so far progress has
matter most. been uneven, especially with respect to subsidies and trade.
To summarize, these studies suggest that poverty would One part of the challenge at the national level is to ensure that
gen- erally increase in the short run if food prices were to rise the poor and vulnerable—namely, nonmarginal net buyers of
sub- stantially, including rural poverty, and Zezza et al.’s food—do not slip further into poverty. Macroeconomic
(2008) study also offers insights into which types of policies can buffer the rise in food prices to some extent,
households are most vulnerable to rising food prices. At the while microe- conomic social protection programs can more
same time, it is important to remember the limitations of these aptly target the most vulnerable populations. A second
simulations. Ul- timately, we still need to learn much more challenge, however, is to use this crisis to permanently lift
both about actual price changes, the additional impacts of poor producers of food—who comprise some 60–70% of the
increased fuel and fer- tilizer prices, the short term behavioral world’s poor—out of poverty. Even prior to the current crisis,
responses to rising food prices, and about how government many development specialists had called for renewed efforts
policies can influence these outcomes. to invoke a Green Revolution in Africa (see Diao et al.,
2008), and the recent price surge has clearly brought renewed
attention to agricultural development issues. The challenge,
4. Knowledge of the past and expectations of the however, will be to sustain these efforts once prices have
future fallen, once grain stocks have been rebuilt, and once the crisis
The recent surge in food prices has been widely termed a atmosphere has abated. 21 After all, for the 800 million hungry
crisis, and not without justification. A conflagration of factors
caused food prices to rise much more quickly than is desirable
(Section 2), and whatever the precise impacts so far (Section Acknowledgments
3), it is clear that many of the world’s poor have already
experienced the harsh reality of more costly sustenance. We would especially like to thank Nurul Islam, Marc
Moreover, although food prices have probably already Cohen,
peaked, food prices are, in real terms, expected to stay high Dennis Petrie, David Orden, Xinshen Diao, seminar
for several years to come (USDA, 2008a), especially if oil discussants at a seminar given at IFPRI’s Washington, DC
prices remain high and demand for biofuels persists. On this headquarters, and a wide range of colleagues, for very
basis it would be premature to conclude that the crisis is over. insightful comments and suggestions.
But despite the acute problems that rising food prices have 21
caused, this is a crisis that also presents opportunities for pos- Here we are paraphrasing Valdes and Siamwalla (1981), who came to the
following conclusion in the years following the 1972–1974 crisis:
itive change. As was the case in 1974, the current crisis has “International prices of cereals have fallen in real terms, grain stocks have
made the weaknesses of the global food system transparent been rebuilt, and the crisis atmosphere has abated. World food security has
ceased to be a major concern for the press and for the general public. Yet,
the underlying causes of food crises such as the one in 1972–74 have not
is sometimes argued that household income is also underestimated in these disappeared . . . on the international scene only limited progress has been
surveys. made to help them in these efforts.”
 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375– 389
391
Appendix A. Additional data
Table A1
Trends in stocks relative to domestic consumption plus exports among major exporters and
consumers
Commodity Country Major exporter? Stocks/(cons+exports) Outcome
1990–2000 2005–2008

Maize Argentina Ye 6 7 Up, but low

India s 3 7 Up, but low
United States Ye 16 12 Well down
China s 93 24 Well down, but still high
EU-15 8 14 Up
World 26 14 Well down
World, exc. 12 12 Unchanged
Rice China Moderate 70 29 Well down
China Yes 18 13 Down
India Yes 19 8 Well down
Pakistan Yes 7 13 Up
Thailand Yes 15 14 Same
United States Yes 2 7 Up, but low
Vietnam 22 37 Up
EU-15 33 17 Well down
World 14 13 Largely unchanged, but low
World, exc.
Wheat No 17 11 Down, below “optimum”
China
Yes 4 3 Always low
Pakistan Yes 20 35 Up
Argentina Yes 32 24 Down, but still high
Australia Yes 16 11 Down, below “optimum”
Canada Yes 13 6 Down, below “optimum”
EU-15 Yes 23 14 Down
India Yes 16 7 Down, below “optimum”
Kazakhstan Yes 23 11 Down
Russia Yes 27 21 Down, but still high
Ukraine 71 38 Well down, but still very
United States Ye 27 18 high Down, but still
China s 19 14 “optimal” Down, below
World “optimum”
Source: Authors’ calculations based on USDA data
(2008d).
Table A2
Dependency on U.S. imports and exchange rate
appreciation
Region U.S. wheat imports U.S. corn imports Real appreciation against USD: Foreign reserves,
(% consumption) (% consumption) 2002–2008 (% change) 2008 (months imports)

Middle East & N. Africa 2 15 20 15.0

Caribbean 28 36 15 3.5
Dominican Rep. 46 49 12 2.6
Haiti 26 n.a. 5a 3
Trinidad & Tobago 48 95 18 NA
Jamaica 26 100 15 4.1
Central America 45 24 10 3.5
Costa Rica 55 47 10
El Salvador 31 21 8 3.2
Guatemala 46 20 26 4.1
Honduras 45 21 12 3.5
Mexico 20 13 −2 3.7
Nicaragua 46 9 4 1.7
Panama 44 80 0 4.1
South America 4 1 25 8.7
Colombia 23 31 41 6.3
Ecuador 9 23 8 2.5
Peru 9 6 20 15.5
Venezuela 27 22 −12 NA

Continued
390 D. Headey, S. Fan/Agricultural Economics 39 (2008) supplement 375–
391
Table A2
Continued.

Region U.S. wheat imports U.S. corn imports Real appreciation against USD: Foreign reserves,
(% consumption) (% consumption) 2002–2008 (% change) 2008 (months imports)

Sub-Saharan Africa 10 0 40 7.0

SSA nonoil 5.0
Ghana 10 0 35 2.2
Nigeria 42 0 42 20.6
East Asia 2 7 1 NA
Hong Kong 1 49 −21 NA
Japan 26 90 2 NA
Korea, Rep. 16 28 15 NA
South Asia 0.3 0.4 22 5.6 (4.0)b
Southeast Asia 12 1 25 6.0
Thailand 19 0 30 7.1
Philippines 32 0 29 6.3

Source: Authors’ calculations based on USDA data (2008c) for imports and IMF’s (2008b) exchange rate
data.
a
Only the nominal exchange rate is reported for Haiti because of missing inflation data.
b
This is the average after India is excluded.
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