Farming alone doesn't drive food prices
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Another group says prices are rising because too much land is being used for biofuel production. But the highest price rise has been for non-biofuel crops such as rice, wheat and cotton. Then we have a group that says it is early evidence of climate change, but the production shortfalls that helped drive up wheat prices in 2010 took place in Russia and Canada, both high-latitude countries where global warming would be good for future production.
Apart from macroeconomic forces, the trade policies of some exporting countries have worsened global price fluctuations recently. At the beginning of summer last year, there was no fundamental reason to expect higher wheat prices because global stocks were 50 percent above the 2008 level and stocks in the US - the largest wheat exporting country - were at a 23-year high.
But when a severe drought in Russia drove up prices in that country, the government banned all grain exports. That created fear in the international market, which aggravated when Canada's wheat crop fell short of expectations because of excessive moisture problems and Australia's crop was damaged by floods.
Yet at the end of 2010, world wheat stocks were still 40 percent above the 2008 level and US stocks were still up 150 percent. Fear, however, was now driving international prices, worsened by new worries over drought in China's winter wheat belt.
For countries like China, the focus should not be on international food prices but on domestic price trends. The worrying increase in China's domestic consumer price index (up 5.4 percent last year) has not been generated by international shortages but instead by two decisions China has taken. One was the timely and sound decision to provide a large economic stimulus in 2008-09, to protect the country against a painful slowdown in growth during the global financial crisis. The second decision, to prevent China's currency from rising to an "appropriate" level, is debatable, though.
If China raises the exchange rate to the proper level, it can ease the inflation pressure and lower domestic prices, including food prices. Things could get worse if China tries to fight inflation by raising interest rates alone, because that would bring down domestic price levels at the expense of economic growth.
It is good that China is responding to its current threat of drought with initiatives such as cloud seeding, water diversion to arid and drought-prone areas, and assistance to farmers who need irrigation. Yet the management of food price volatility requires action outside the food and farming sector as well.
The author is B. F. Johnson professor of political science, Wellesley College, and adjunct professor of public policy, Harvard Kennedy School.
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