University of Nebraska - Lincoln DigitalCommons@University of Nebraska - Lincoln Dissertations, Theses, and Student Research from the College of Business Business, College of 12-2011 World Food Crisis: Imperfect Markets Starving Development, A Decomposition of Recent Food Price Increases Christine Costello University of Nebraska-Lincoln Follow this and additional works at: https://digitalcommons.unl.edu/businessdiss Part of the Agricultural and Resource Economics Commons, Business Commons, Growth and Development Commons, and the International Economics Commons Costello, Christine, "World Food Crisis: Imperfect Markets Starving Development, A Decomposition of Recent Food Price Increases" (2011). Dissertations, Theses, and Student Research from the College of Business. 26. https://digitalcommons.unl.edu/businessdiss/26 This Article is brought to you for free and open access by the Business, College of at DigitalCommons@University of Nebraska - Lincoln. It has been accepted for inclusion in Dissertations, Theses, and Student Research from the College of Business by an authorized administrator of DigitalCommons@University of Nebraska - Lincoln. WORLD FOOD CRISIS: IMPERFECT MARKETS STARVING DEVELOPMENT A DECOMPOSITION OF RECENT FOOD PRICE INCREASES by Christine Costello A THESIS Presented to the Faculty of The Graduate College at the University of Nebraska In Partial Fulfillment of Requirements For the Degree of Master of Arts Major: Economics Under the Supervision of Professor Hendrik Van Den Berg Lincoln, Nebraska Dec, 2011 WORLD FOOD CRISIS: IMPERFECT MARKETS STARVING DEVELOPMENT A DECOMPOSITION OF RECENT FOOD PRICE INCREASES Christine Costello, M.A. University of Nebraska, 2011 Adviser: Hendrik Van Den Berg The recent decade has experienced two rather substantial food price spikes. This thesis sets out to provide an in-depth look at the recent food price increases by achieving two goals: assessing the forces driving food prices, and determining the magnitude of those forces. These goals are reached by reviewing selected rhetoric on the recent food price increases, analyzing case studies, and lastly determining our modeling capabilities in decomposing food price changes. Additionally, this thesis will serve as a tool for stakeholder's to better address critical policy issues surrounding food, agriculture, and energy policies. Table of Contents List of Tables .............................................................................................................iv List of Figures ...........................................................................................................iv Chapter 1: Introduction...............................................................................................5 Chapter 1.1: Background............................................................................................5 Chapter 1.2: Good versus Bad Debate.......................................................................7 Chapter 2: Elements Affecting Recent Spikes in Food Prices…..............................10 Chapter 3: Supply Shocks.........................................................................................11 Chapter 3.1: Adverse Weather Conditions.....................................................12 Chapter 3.2 Land Availability........................................................................16 Chapter 3.3 Water Availability.......................................................................22 Chapter 3.4 Climate Change..........................................................................28 Chapter 3.5 Low Productivity........................................................................37 Chapter 3.6 Biotechnology............................................................................43 Chapter 4 Demand Shocks........................................................................................49 Chapter 4.1 Biofuels ….................................................................................50 Chapter 4.2 Income Growth..........................................................................59 Chapter 5: Macroeconomic Factors...........................................................................70 Chapter 6: Self-Fulfilling Prophecy...........................................................................76 Chapter 7: Speculating on Speculation......................................................................79 Chapter 8: Policies.....................................................................................................84 Chapter 9: Biofuel Policies........................................................................................87 Chapter 10: The Good Guys?....................................................................................89 Chapter 11: Market Matters.......................................................................................93 Chapter 12: Summary................................................................................................100 Chapter 13: Case Studies...........................................................................................102 Chapter 14: Modeling Capabilities..........................................................................109 Chapter 15: Conclusion............................................................................................117 References.................................................................................................................121 Appendix...................................................................................................................131 iv List of Tables TABLE 3.1 Extreme Weather Events Between June and December 2010........................13 TABLE 3.1 Estimates of adaptation costs in developing countries, for 2010-2015..........35 TABLE 4.1 World Cereal Consumption 2009/10 – 2010/11.............................................51 TABLE 4.2 Estimated Percentage of Food Inflation due to Biofuels...............................58 TABLE 11.1: Peasant Versus Agribusiness.......................................................................96 List of Figures FIGURE 1.1 FAO Food Price Indices.................................................................................6 FIGURE 1.2 FAO Food Price Index....................................................................................6 FIGURE 3.1 Duration of Current Food Emergencies (years)...........................................14 FIGURE 3.2 Area of Land Deals 2001-11.........................................................................19 FIGURE 3.3 Water Availability Map.................................................................................23 FIGURE 3.4 Global Access to Water (2010).....................................................................25 FIGURE 3.5 Water and Food Security (2010)...................................................................26 FIGURE 3.6 World Production for Past Two Years...........................................................39 FIGURE 3.7 World Produciton 2007/08, 2010/11.............................................................40 FIGURE 4.1: U.S. Area Planted For Corn and Soybean Last Decade..............................53 FIGURE 4.2 China's Supply Utilization Balances for Major Grains and Soybeans.........61 FIGURE 4.3: Global Meat, production, per capita consumption, and population ….......66 FIGURE 4.4: Total World Grain & Oilseed.......................................................................67 FIGURE 6.1: US Food Prices and US Inflation Expectations...........................................78 FIGURE 11.1 Inelastic Demand for Food and Supply Decrease......................................97 FIGURE 12.2 Government's Policies Affecting Food Prices..........................................101 FIGURE 13.1 Relative Food Prices as a Function of Macroeconomic variables (LR)...104 5 Chapter 1: Introduction ―Here at home, just as in the third world, hunger is an outrage precisely because it is profoundly needless‖ (Lappe 1998). World hunger beats its way into the rhythm of humanity, a constant to the point of reliability in a universe where the only thing that is certain is uncertainty. In the recent past food prices have increased to record highs. Food price volatility stresses the most vulnerable groups. 925 million people do not have enough to eat and 98 percent of them live in developing countries (FAO 2010). These high food prices are starving development, quite literally. Long-run trends in food prices are not the only increases we have encountered. Encompassing all the factors known to influence food prices, then singling out the abnormalities of the past decade hints us towards explaining the distortions away from food price trends. What exactly is behind these recent food price increases? Everything we are seeing in terms of food prices are not new to the past decade, yet the occurrence of food price spikes has increased. What are the driving forces creating volatile food prices? This thesis sets out to provide an in-depth look at the recent food price increases by achieving two goals: assessing the forces driving food prices, and determining the magnitude of those forces. These goals are reached by reviewing selected rhetoric on the recent food price increases, analyzing case studies, and lastly determining our modeling capabilities in decomposing food price changes. Additionally this thesis will serve as a tool for stakeholder's to better address critical policy issues surrounding food, agriculture,