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CHAPTER 2 Causes of the Crisis B


road-based research studies have attempted to identify the factors that might have caused the recent surge in food prices, but only a few have attempted to add explicit (albeit approximate) orders of magnitude to each factor. In this chapter we review, reassess, and extend the evidence on this issue. A significant constraint on all assessments of the crisis, including ours, comes about because it is a global phenomenon and one regarded by many as a distinct event. Thus some of the usual tools favored by economists for uncovering causality, such as regression analysis or simulation models, have quite limited application in this context. Instead, some less formal “detective work” is needed, involving a mix of economic theory, economic history, and more rudimentary statistical analysis. The review begins with a reassessment of the basic facts of the crisis. Bearing these facts in mind, each individual explanation of the crisis is assessed in terms of how well it holds up against both the general facts and the more specific evidence.


Commodity Price Formation: A Conceptual Framework Implicit in all discussions of the causes of rising food prices is some model of commodity price formation. That said, there seems to be little agreement as to how international commodity prices are formed. As we discuss below, some writers emphasize traditional agronomic determinants of commodity prices (such as the role of stocks and the interactions between stocks and various supply and demand movements), some see macroeconomic phenomenon as critical, and still others emphasize the role of futures markets in influencing spot prices. Less frequently discussed is whether international price increases are predominantly driven by price changes in U.S. markets—because the United States is the largest exporter of maize and wheat, and the third largest exporter of soybeans—or whether other markets are also price makers. To address the price-formation question more explicitly, Figure 2.1 sets out a comprehensive model of price formation in major international (exporter) grain markets. The model is centered around the complex interactions among supply, demand, actual prices, and price expectations. Buyers and sellers of


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