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6 CHAPTER 2


grain reach price arrangements based on a host of supply and demand condi- tions but also on expectations of future prices, especially as grains are storable commodities. Price expectations themselves are influenced by current prices and supply conditions (such as area planted, levels of stocks, and weather forecasts) but also by grain reports (which transmit explicit information on supply and demand conditions) and futures markets (which transmit more implicit information about where market actors think prices may be heading over various time horizons). The remainder of the model sets out some of the hypothesized determinants of price movements in the current crises—such as the interplay among weather, export restrictions, and precautionary (or panic) purchases —and such factors as exchange rate movements, economic and popu- lation growth, R&D, and the nexus between oil prices and biofuels. The model’s transmission mechanisms and outcomes are conditioned by a range of parameters and relationships (listed as “additional factors” in the box on the right side of Figure 2.1), including supply and demand elastici- ties, interaction effects among factors, feedback loops, and various dynamic nuances relating long- versus short-term price adjustments. These complexi- ties have some important implications for how well any analysis can identify the causes of the crisis, particularly more formal analytical techniques, such as simulation models or time series econometrics. To give just one example, Headey (2010) argues that two of the most important causes of the food crisis were government interventions on both the supply side (for example, export restrictions) and the demand side (such as government-to-government import deals). In effect, these policies meant that supply and demand elas- ticities changed during the crisis in quite perverse ways; that is, high prices led to supply restrictions and demand surges. Hence simulation models or time series regressions that use or derive pre-crisis parameters could well be incorrectly specified. So instead of adopting these more formal but more restrictive techniques, we opt to treat the crisis as a distinct event—albeit one with similarities to previous crises—best investigated with what we can only describe as economic detective work. To push that analogy further, we acknowledge upfront that most of the evidence that we and others bring to bear on this case is circumstantial at best.


Some Basic Facts of International Grain Markets In addition to the general model in Figure 2.1, it is also important to consider how the four major international markets for staple foods—maize, rice, soy- beans, and wheat—vary with respect to price formation.1 Some of the major facts of these grain markets are as follows:


1 The following paragraphs draw heavily from Schepf (2006).


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