CAUSES OF THE CRISIS 7


1. Dominance of the U.S. grain markets. The United States heavily dominates global exports of maize (60 percent) and wheat (25 percent), and although U.S. soybean exports have been overtaken by those of Argentina and Bra- zil in recent decades, the United States is still the world’s third largest soybean exporter. Only in rice markets is the United States not a leading exporter. Hence U.S. grain prices are typically quoted as international prices for all grains except rice, where Thai prices are typically quoted.


2. Importance of U.S.-specific factors. Given Fact 1, events in the U.S. economy or in U.S.-dominated grain markets can be thought of as possible suspects in the recent food crisis. Such events include the advent of bio- fuels, the depreciation of the U.S. dollar and the build-up of dollar reserves in other countries, and movements in commodity futures markets. That said, trade shocks in the U.S. market are also important. Schepf states that “Since the market events of 1972 [in which the Soviet Union made unexpected purchases of large amounts of U.S. grain] most market observ- ers consider exports to be the great uncertainty underlying commodity supply, demand, and price forecasts” (2006, 17).


3. Degree of competition and market efficiency in the United States. These three U.S. grain markets are highly commercialized and, despite the impor- tance of some large players (for example, Cargill), these markets are highly competitive. They have a sophisticated market infrastructure, including the information services of the U.S. Department of Agriculture (USDA) and the price-discovery functions afforded by futures markets.


4. Seasonality and inelastic supply and demand functions. Because most grains are limited to a single annual harvest, new supply flows to market in response to a postharvest price change must come from either domestic stocks or international sources. Hence, supply elasticities tend to be highly inelastic in grain markets, making them very vulnerable to relatively small shocks, especially when stocks are low. Similarly, demand elasticities tend to be low, because the farm cost of basic grains generally amounts to a small share of the retail cost of consumer food products in developed countries.2 In poor countries demand can be inelastic for the opposite reason: poor people are so close to subsistence that higher prices of their staple grain force them to concentrate their consumption on this essential item.3


2 In other words, changes in grain prices generally have little impact on retail food prices and therefore little impact on farm-level demand. For example, a 20 percent rise in wheat


prices would translate into only about a 1 percent rise in the price of a loaf of bread. 3 Indeed, higher prices could even induce the very poor to consume more of the grain (Jensen and Miller 2008).


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