Food Price Shocks and the Coronavirus Crisis

Why haven’t we seen a spike in food prices during the coronavirus crisis?

Global food prices are determined by supply, demand, and to a large extent, the perception that supply or demand might change in the near future. The most dramatic food price shock in recent years occurred in 2007 – 2008, when the UN FAO relative Food Price Index (FPI) doubled in the space of a few months. The FPI is a measure of the monthly change in international prices of a basket of food commodities, either in aggregate or broken down into broad categories (Cereals, Dairy, Meat, Oils, Sugar). When FPI increases, people are spending more on food.

You might think that price increases are driven by declines in production, but that isn’t the usually the case. In 2007-8, the world produced plenty of rice, maize, and wheat, the major cereal crops. What appears to be cause is that there was economic panic by governments and opportunism by market speculators. News headlines from 2008 tell the story:

“As Australia dries, a global shortage of rice” – NY Times, 17 April 2008

“Starving Haitians riot as food prices soar” – The Independent, 10 April 2008

“UN chief: Food crisis reaches emergency level” – USA Today, 14 April 2008

“UN food crisis summit leaders fail to agree on plan” – The Telegraph, 6 June 2008

Australia did indeed suffer a catastrophic collapse in rice production due to drought, but Australia is a very small player in global rice production, and there was certainly no global shortage of rice. However, governments in producing countries implemented a series of export bans to protect their own supplies, thus reducing supply on global markets. Simultaneously, the financial derivatives market was collapsing due to the US sub-prime mortgage debacle, and speculators looked for alternative investments. The perceived decline in agricultural commodity supply made commodity futures highly desirable.

What made governments panic and restrict supplies in 2007-8 in particular? Brian D. Wright of the University of California, Berkeley (see Further Reading) found that price shocks tend to occur when the global stock-to-use ratio, i.e. the relative amount of food we have in store, drops below about 15% of what we need. Currently, the global stock-to-use ratio for cereals is around 30%, comfortably above the danger threshold. So, despite the massive financial impact of the global lockdown, we don’t expect food prices to increases dramatically. And so far, they haven’t.

UN FAO Food Price Indices for Food and commodity categories, Jan 1990 – May 2020.

Further reading

Headey D. 2011. Rethinking the global food crisis: The role of trade shocks. Food Policy 36: 136–146.

Wright BD. 2011. The economics of grain price volatility. Applied Economic Perspectives and Policy33: 32–58.

UN FAO Cereal Supply and Demand Brief

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