Food Price Rise Suggests Long-term Supply-Demand Mismatch
The Economist wonders why food prices are rising during a recession. “Between December and mid-June, the food index rebounded by a third, even though this year’s total cereals crop is expected to be another bumper (2.2 billion tonnes, says the Food and Agriculture Organisation, second only to 2008/09). Meanwhile, soyabean and sugar prices have risen by nearly half from trough to peak—see chart below—and the index of “non-food agriculturals” (plants such as cotton or rubber) also rose by a quarter between December and mid-June. Prices have been increasing at a time of plenty.”
The Economist says there are two clusters of explanation: cyclical factors—features of the farm cycle and world economy that fluctuate from season to season—and secular, long-term factors.
“On the face of things, markets last year were adjusting exactly as economic theory predicts they should: prices rose, drawing investment into farms; supplies then rose sharply, pushing prices down. But that was not the whole story.”
“The price fluctuations of 2007-09 suggested that uncertainty in the world of agriculture was deepening under the influence both of oil prices and capital flows.”
The fact that prices are still well above their 2006 average, even in a recession, suggests that the spike of 2008 did not signal a mere bubble—but rather, a genuine mismatch of supply and demand.
“And this year’s price increase suggests that there is a long way to go before that underlying mismatch is eventually addressed.”
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