Evaluating the Causes of Rising Food Prices in Low and Middle Income Countries

Article excerpt

The effects of population, income, prices of major inputs, and exchange rate of the U.S. dollar on the prices of three key agricultural and food commodities (feed grains, oilseed, and fruits) for 13 low-income countries and seven middle-income countries were evaluated. Given the short time period, a modified seeming unrelated regression-vector autoregressive model that incorporates the lagged exogenous variables property of time series models and the system of equation estimation is employed in the analysis. The study finds no single factor that persistently explains all soaring food prices as reported in the literature. The only factor that persistently explains soaring food prices are the contemporaneous and one-year lagged exchange rates and income.

Key Words: food prices, low and middle-income countries, seeming unrelated regressionvector autoregressive model

JEL Classifications: Fl, C3, Q17

Since the second half of 2006, world prices of most major food commodities began to climb. By the first half of 2008, international U.S. dollar prices of cereals had reached their highest levels in almost 30 years, threatening the food security of the poor worldwide and provoking widespread international concern over an apparent world food crisis. Even though the second half of 2008 saw a rapid fall in international food prices as oil prices tumbled and the financial crisis and global recession reduced demand, prices are well above the levels seen in recent years and are expected to remain so (Food and Agriculture Organization (FAO), 2009). Many poor consumers still face high or rising food prices. Moreover, while international food prices may have fallen, many of the adverse supply and market conditions remain unchanged.

While the broad facts of the soaring food prices episode may be well known, questions remain concerning the relative importance of the various factors suggested as being responsible. This is because the more recent price surge is much more broadly-based across food groups (World Bank, 201 1). As a result, various factors have been suggested as being responsible. These include biofuel demand, record oil prices, speculation and investment fund inflow, and increasing food demand arising from rapid economic growth in China and India or traditional market drivers such as low stock levels or weather-related supply shortfalls. The price of key inputs such as energy and fertilizer as well as exchange rate and other trade barriers such as import tariffs and export taxes have also been suggested as the probable cause.

Each of these factors may affect the prices of specific food and agricultural commodity prices. Biofuel production may reduce the availability of food commodities on the market since this new source of demand has been playing an important role in influencing prices of corn (a feedstock for ethanol production) and rapeseed (a feedstock for the production of biodiesel). The rapid economic growth, and increasing incomes in China and India particularly, are believed to be reflected in stronger demand for higher-value foods (such as livestock products) as opposed to starchy staples (such as wheat). However, the prices of starchy staples are equally rising. Therefore, the widely accepted notion that rising demand in these two most populous countries (China and India) is a reason for soaring food prices warrants re-examination (FAO, 2009).

Furthermore, a proportion of these price increases can be attributed to the depreciation of the U.S. dollar, in which international prices tend to be denominated. Because most commodity prices are commonly expressed in U.S. dollars, depreciation in the value of the U.S. dollar reduces the cost of commodities for countries whose currencies are stronger than the U.S. dollar, resulting in a cushioning of food price increases to a greater or lesser extent. On the other hand, for countries whose local currencies are pegged to or are weaker than the U. …