38 CHAPTER 2


tem make us skeptical that declining stocks are a principal cause of the crisis. There are also legitimate reasons to think that larger stocks are not an impor- tant part of the solution. Maintaining high levels of stocks is costly, multi- lateral grain reserves suffer from weak incentives for participation, and trade liberalization is potentially a viable alternative to large international reserve systems. However, we leave this complex issue for future research.10


Decline of the U.S. Dollar


Some analyses have at least made passing mention of the weakening of the U.S. dollar over the past 6 years and have even analyzed the simple arith- metical implications of depreciation for transmission of international prices into domestic prices. However, only one or two papers have also assessed the extent to which the depreciation of the dollar has had a causal impact on food prices, and, as noted above, the rise in commodity prices is much less when converted to euros.


Why the U.S. dollar has depreciated as it has does not particularly concern us here, although the most obvious cause of the general decline is the large U.S. trade deficit and low real interest rates in the United States. Of more interest is how the depreciating dollar might have caused changes in food prices and in a broader range of commodity prices. Abbott, Hurt, and Tyner (2008) make note of three crucial facts regarding these relationships. First, the patterns of commodity price changes and nominal exchange- rate movements have been similar since 1970: when the dollar is weak, com- modity prices are generally high, and when the dollar is strong, commodity prices decline (this pattern is also shown by the decline in food prices and the strengthening of the dollar since mid-2008). In the case of oil, the rela- tionship has often been quite direct. A weakening U.S. dollar was one of the primary motivations for OPEC’s decision in 1974 to raise oil prices. In the current crisis the divergence between the dollar and many (but not all) other currencies is quite stark compared to previous increases in nominal dollar- denominated food prices (such as during 1995–96). Second, the variations in commodity prices have always been greater than changes in exchange rates, which is especially true for the recent dollar depreciation. This phenomenon is perhaps due to the dampening effects of capital flows. And third, changes in agricultural commodity prices also appear to have lagged other commodity price changes, especially since 2002, so that recent high agricultural com- modity prices are just now catching up with price increases for oil and metals


10 See Headey and Raszap Skorbianksy (2008) for a review, as well as Williams and Wright (1991) and <http://www.bufferstock.org/biblio.htm#trade>.


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