Why are the current global food prices so high?

Food prices have been steadily rising since 2006

This affects the entire global population, but mostly the very poorest people in the world. The Agricultural Economic Institute (LEI ) of Wageningen UR has identified the various causes of these price increases. This overview will result in the development of a suitable policy mix which will allow a response to the price increases and help avoid policy measures which could have a counterproductive effect.

Since 2006, the raw materials prices for agricultural products such as wheat, maize, soya, rice and palm oil have increased significantly. These price increases affect the entire global population. In order to take price-reducing measures, it is necessary to determine the causes of the increases. Through this study, LEI is attempting to provide insight into the causes and prospects for the high world food prices. This overview can help the policymakers of the world develop policy that will slow down price increases.

Agricultural markets

In historical terms, global agricultural prices have always been subject to strong fluctuations. This is related to the short-term characteristics of the agricultural markets where supply is heavily dependent on the weather, and demand is relatively stable. In recent years, agricultural prices have increased substantially. The prices for other raw materials such as crude oil have increased even more. Now that both agricultural prices and the price of crude oil are rising, the prices of processed and unprocessed foods are higher.

Population growth

In order to predict the prices of agricultural products in the future, it is important to take a look at supply and demand. The demand for agricultural products is primarily determined by the growth in the population and prosperity. For the coming decade, a decrease in population growth and a robust economic growth are expected. This means an increase in the demand for agricultural products. In addition, the non-food demand is growing because biomass is replacing fossil raw materials as a fuel source. The supply of agricultural products depends on the area of land used for agriculture and the yield per hectare. During the coming decade, a slight increase in the area of land used for agriculture and productivity are expected.

Food prices

The high agricultural prices are attributable to a combination of factors. A distinction may be made between the effects of supply, demand, policy and other factors. Over the past several years, the supply of raw materials has dropped as a result of poor harvests caused by extreme weather conditions. Global stocks have also reached unprecedented low levels. The high oil prices are also affecting the food prices. The demand for raw materials has risen worldwide due to the developing economies. The interest in biofuels has also increased the demand for grains and oilseed.

Protectionist measures

In response to the rising food prices, some countries are taking protectionist measures to limit the food price increases for their own consumers. On the global market, this often means a further increase in prices. The exchange rate of the U.S. dollar also has an impact. Global prices are quoted in dollars and the value of the dollar has dropped against most other currencies. The price increases in dollars were even higher as a result. It is difficult to estimate the influence of speculation.

Global market

The best remedy for high prices is high prices. Although this may sound contradictory, high food prices ensure that farmers and other market players will start responding. This will in turn cause the prices to drop again. The rise of biofuels ensures a higher demand for raw materials and will thus serve to drive prices up. A rising oil price will also result in a higher food price. This is not only due to the increase in the costs of energy, transport and chemicals, but also because biofuels are becoming more competitive.

Produtction capacity low-wage countries

Consumers in low-wage countries are affected the most by high food prices due to the high percentage of their income that they spend on food. For this reason, it is necessary to increase food aid in the short term, and to improve production capacity in low-wage countries in the long term. This will allow them to contribute to generating income on the global market as well.

The full report may be viewed on the Wageningen UR digital library.