CAUSES OF THE CRISIS 19


China is not a major exporter of maize, and China’s stock levels were exces- sively high prior to the recent surge and—at 22 percent of consumption—are still robustly above so-called optimal levels of 17–18 percent. And as for other cereals, China has long held excessively large stocks of wheat and rice. These stocks have declined somewhat in recent years, but relative to cur- rent consumption they are still extremely high. Indeed, Slayton and Timmer (2008) have suggested that China could largely solve the rice-price problem simply by releasing these stocks. So if China’s declining levels of stocks have had an effect on prices, it may be through some indirect effects on market psychology. But because China is not a major exporter of these commodities and looks unlikely to become a major importer any time soon, such a strong sensitivity to Chinese stock estimates among non-Chinese markets would seem somewhat irrational.


As for Indian stocks of major cereals, these have been quite low in recent years (see below), and agricultural output growth in India has been volatile, but sluggish on average. However, India is not a major importer of cereals. In fact, it is typically the world’s second largest rice exporter and is also a moderately large exporter of wheat. However, a poor wheat harvest in 2006/07 led to pressure on India’s wheat stocks and India’s Public Distribution Scheme, which keeps stocks of both wheat and rice (Gulati and Dutta 2009). In 2006/07, government stocks of wheat fell short of buffer-stock norms, and about 6 million metric tons5 of wheat were imported. And although rice was in surplus and India exported more than 4.5 million tons of rice that year, the fear of a food shortage influenced policymakers, who faced impending national elections. Hence India’s decision to ban exports was not the result of rising economic growth or the end of India’s self-sufficiency in grain pro- duction but rather the interplay of bad weather, government policies, and national politics.


All in all, then, we believe that the China–India hypothesis can largely be dismissed as a direct explanation for the price surge. However, this is not to say that economic growth in general was not a factor contributing to the crisis. As we argue below, monthly trade data suggest that several demand surges in recent years seem to be closely linked with international price movements. But these demand surges came from a diverse array of countries that do not include China or India. In addition, China’s contribution to the rising prices of oil and other nonfood commodities was indeed a significant, albeit not the sole, factor involved.


5 Throughout this monograph the term “tons” refers to metric tons.


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