14 CHAPTER 2


prices peaked in May 2008, but by March 2009 prices of staple grains had fallen by 30 percent from that peak, while energy prices fell by about 50 percent. Figure 2.3 shows that nominal prices have rebounded somewhat since the second half of 2008, with 2009 price still significantly higher than they were in 2005 or 2006. Nevertheless, the rapid rise and fall of commodity prices suggests a commodity bubble, with peak prices reflecting some kind of overshooting effect. Whether this effect is related to oil prices, dollar movements, export restrictions, or demand surges is ultimately an empirical question we shed light on in the next section.


Assessing Existing Explanations of the Crisis


As for the factors that are hypothesized to have caused the crisis, Trostle (2008) provides a very useful timeline of events, which we present in Figure 2.4. The timeline distinguishes between supply- and demand-side factors, and also distinguishes between long-term factors (such as strong growth in demand and slowing agricultural production), medium-term factors (for example, dollar devaluation, rising oil prices, biofuels production, and the build-up of foreign exchange reserves); and short-term factors (such as adverse weather and various trade shocks). Following the taxonomy in Figure 2.4, the following discussion is structured around this chronology of events.


Strong Growth in Demand, Especially from China and India Many studies, policy briefs, and media publications have attributed rising food prices to strong economic growth, especially the rapid growth in China and India. It is an explanation that has some intuitive appeal in that two countries with a combined population well in excess of 2 billion people, many of whom are indeed experiencing rapid income growth, have enormous potential to augment global demand for food and other resources. Such popu- lar books as Who Will Feed China? have documented this possibility (Brown 1995). Many observers writing on the crisis have referred to changing con- sumption patterns in China and India, particularly the rapid growth in meat and vegetable consumption.


In our reckoning the Asian-diet hypothesis is not corroborated by avail- able data. Although it is true that diets in countries like China and India are changing, it is not at all obvious that these countries are becoming more dependent on cereal imports (except in the case of Chinese soybean imports, discussed separately below). For example, cereal import trends around the world indicate that Spain and Mexico stand out as the two countries that have most increased their cereal imports in the 2000s. No Asian country figures in the top 10 of that list, and China actually imported fewer cereals in the 2000s than in the 1990s (although the composition of imports changed). Indonesia


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