All eyes are focused on the world’s food economy as food prices show renewed buoyancy, just 3 years after their previous spike. By March 2011, the World Bank’s food price index was close to its previous 2008 peak, generating fears that the world is just an event or two away from a major food crisis. The Bank’s Food Price Index ruled 36 per cent higher than a year earlier, with increases being the sharpest in maize, wheat, palm oil and soya bean (see chart).

Much of the discussion on the food price increase has focused on the supply side factors that are seen to influence price trends. But the figures do not warrant alarm. Consider cereals, for example. According to the FAO, world production of cereals fell marginally in 2009/10 (from 2286 million tonne to 2262 million tonnes) and is expected to slip further to 2236 million tonnes in 2010/11. On the other hand, utilization, which rose from 2234 to 2278 million tonnes, is expected to stabilize at the latter level in 2010/11. This would necessitate running down inventories to a small extent, but stocks are expected to remain at a comfortable 481 million tonnes in 2010/11 as compared with 528 million tonnes in 2009/10.

Thus, while there is minor cause for concern, this is hardly a scenario that is expected to lead to a spike in prices. Clearly, other factors are playing a role here. Some have turned to oil price trends as a potential explanation. Oil is a universal intermediate entering food production costs both through inputs like fertiliser as well as services such as transportation. Further, as has been noted often, sharp increases in oil prices tend to divert land and outputs of corn, vegetable oil and sugar to biofuels production. This can and does affect food supplies and prices. But this too cannot work its way through to drive short-term price spikes of the kind being witnessed currently.

The way in which factors such as these, besides the impact of climate variability attributed to global warming, can possibly influence price movements is through its effect on speculative holding and trading in commodity futures and derivatives. As has been observed from exchanges in Chicago to emerging markets, those trades do influence spot prices.

Two factors allow for the amplification of the effects of factors of the kind mentioned above on speculators’ expectations. The first is a long-term neglect of agriculture, resulting in movements in productivity and cost-to-farm gate price ratios that point to the declining profitability of cultivation. A corollary is that demand in the long run tends to grow faster than supply, however marginally, providing the soil for speculation. The second is that recent years have seen a substantial easing in the availability and cost of liquid funds, encouraging both stockholding by limiting carrying costs as well as speculative trading based on leveraged funds.

In the past trends of this kind in the prices of agricultural commodities in general and food in particular would have forced governments to act, because of the impact they had on growth. With manufacturing costs substantially influenced by the prices of agricultural raw materials and agricultural wage goods, and manufacturing demand dampened by diversion of incomes to more costly food purchases, agricultural price inflation squeezed manufacturing profits between rising costs and stagnant prices, with the latter held down by the diversion of demand away from manufactures to food.

But for some time now, the pattern of growth has been such that non-agricultural growth tends to be focused on sectors that are neither dependent on agricultural inputs nor employ in large numbers workers whose wage bill must rise to accommodate for food price increases. As a result, disproportional growth in the non-agricultural sector does not lead immediately to significant supply demand imbalances for agricultural commodities. Further, non-agricultural growth and profitability had been significantly delinked from agricultural performance.

But there are limits to this kind of delinking of sectors. At some point accumulating imbalances in agriculture, combined with the tendency of finance to bring all sectors under its sway to garner profits from speculation, begin to tell on prices. But even then the immediate impact is on the poor. According to estimates from the World Bank, the increase in food prices since June 2010 are likely to have pushed as many as 44 million additional people below the $1.25 a day extreme poverty line, besides worsening conditions of the 1.2 billion who were already below that line.

The inequality in impact is seen in other ways as well. The evidence from 46 countries indicates that low- and low-middle income countries have experienced higher rates of food price inflation when price spikes occur, partly explaining the large poverty impact of the food price inflation mechanism. This differential transmission of global price movements to poorer countries is explained both by the lower buffer that import-dependent poorer countries have when faced with rising international prices, as well as the lesser ability of governments in these countries to protect their populations. So long as non-agricultural growth in the richer countries is not affected too adversely, the policy response from governments is less visible.

In the event financial speculation subsumes the food economy and hits the poor, directly appropriating as surplus a part of their already low real incomes. It is time for policy to respond.