FIGURE 2 Excessive food price variability for hard wheat
100 120 140 160
20 40 60 80
0
with biofuel mandates, farmers have ramped up production of such crops, increasing the demand for land, water, and nutrients—and therefore the production costs of other food crops. Furthermore, the production of biofuel crops strengthens the links between the highly volatile energy markets and food markets, thereby increasing the volatility of food prices. With more countries, such as India and Peru, enacting biofuel mandates, food price volatility is likely to increase even further. Flexible biofuel mandates that will not contribute to food price volatility could represent alternative mecha- nisms to reduce the potentially negative impact of biofuel policies.3 Extreme weather and climate change. Ex-
Source: C. Martins-Filho, F. Yao, and M. Torero, “High Order Con- ditional Quantile Estimation Based on Nonparametric Models of Regression,”
www.foodsecurityportal.org/sites/default/files/ martins-filho_torero_yao_2011_0.pdf. Accessed April 3, 2012.
are net sellers of food, producing less and having less to sell will reduce their household income and thus still affect their consumption decisions. Finally, increased price volatility over time can
also generate larger profits for investors, drawing new players into the market for agricultural com- modities. Increased price volatility may thus lead to increased—and potentially speculative—trading that in turn can exacerbate price swings further.
DRIVERS BEHIND RECENT FOOD PRICE VOLATILITY
Among the key factors playing a role in creat- ing price volatility are increasing biofuel produc- tion, the medium- and long-term effects of climate change, and higher levels of trading in commodity futures markets. Export restrictions in important food-producing countries also contributed to price increases and market jiters in 2010 and 2011. Biofuel policies. With oil prices at significantly
high levels during 2011, and with the European Union and the United States subsidizing and set- ting mandates for biofuel production, farmers have shiſted their cultivation toward biofuel crops, most of which are also used as food or feed, such as maize, sugar, and oilseeds (Figure 3). To comply
treme weather events helped raise food prices and fuel price volatility in 2007–08 and 2010–11,4 and climate scenarios predict more variable weather events in the future.5 More intense and frequent natural disasters (such as droughts and floods) resulting from climate change could trigger sig- nificant yield losses and subsequent price increases and higher volatility. Indeed, IFPRI simulations show that climate change is likely to push prices up, regardless of whether population (and thus demand for food) grows faster or slower. In contrast to the 20th century, when inflation-adjusted prices of staple grains declined, in the first half of the 21st century, these prices are likely to rise.6 Commodity futures trading. One signal of higher price volatility has been the significant
FIGURE 3 Share of US maize crop used to produce ethanol, 1995–2010
100 150 200 250 300 350 400
50 0
1995 2000 2005 2010
Source: Data from Earth Policy Institute, Data Center: Climate, Energy, and Transportation (2011),
www.earth-policy.org/data_center/C23.
FOOD PRICES 17
Maize production % of maize
10 15 20 25 30 35 40
0 5
used for ethanol % of maize
excessive price volatility
Number of days of
(millions of metric tons) Maize production
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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