High Agricultural Commodity Prices: What Are the Issues?
High Agricultural Commodity Prices:
What Are the Issues?
Updated May 29, 2008
Specialist in Agricultural Policy
Resources, Science, and Industry Division
High Agricultural Commodity Prices:
What Are the Issues?
Prices for nearly all major U.S. agricultural program crops — corn, barley,
sorghum, oats, wheat, rice, and soybeans — have exhibited extreme price volatility
since mid-2007, while rising to record or near-record levels in early 2008. Several
international organizations have announced that the sharply rising commodity prices
are likely to have dire consequences for the world’s vulnerable populations,
particularly in import-dependent, less developed nations. In the United States, high
commodity prices have pushed farm income to successive annual records and have
sharply lowered government farm program costs, but they have also stoked the
flames of food price inflation and have raised costs for livestock producers and food
processors. In addition, high, unexpectedly volatile prices have increased the risk
and costs associated with grain merchandising. In particular, they have dramatically
increased the cost of routine hedging activities (i.e., pricing commodities for
purchase, delivery, or use at some future date) at commodity futures exchanges and,
as a result, have diminished “forward contracting” opportunities for grain and oilseed
producers who are eager to take advantage of record high market prices.
For some crops (particularly for wheat and rice), the price increases are likely
to be relatively short-term in nature and are due to weather-related crop shortfalls in
major producer and consumer countries, a weak U.S. dollar that has helped spark
large increases in U.S. exports, a bidding war among major U.S. crops for land in the
months leading up to spring planting in 2008, and the often perverse price effects
resulting from international policy responses by several major exporting and
importing nations to protect their domestic markets. Assuming a return to normal
weather, these factors will likely self-correct within two growing seasons as global
supplies are replenished and prices moderate. For coarse grains (corn, sorghum,
barley, oats, and rye), oilseeds, and oilseed products (e.g., vegetable oil and meal),
the price increases have also been due to strong, sustained demand deriving from two
sources: robust income growth in developing countries (e.g., China and India), which
has contributed to increased demand for meat products and the feed grains needed to
produce that meat; and growing agricultural feedstock demand to meet large
increases in government biofuel-usage mandates or goals in the United States, the
European Union, and other countries.
Market analysts, including the United Nations’ Food and Agricultural
Organization (FAO), are predicting record global grain and oilseed production in
2008 in response to the high market prices. However, given the overall strength in
demand growth, most market analysts predict that when commodity supplies
eventually recover and prices moderate from current high levels, the new equilibrium
prices will be significantly higher than has traditionally been observed during
periods of market balance.
This report examines the causes, consequences, and outlook for prices of the
major U.S. program crops, and provides references for more detailed information.
It will be updated as events warrant.
In troduction ......................................................1
Global Food Crises Declared by United Nations......................3
Not All Commodities Are Equal..................................4
High Prices: A Case of Deja Vu..................................4
U.S. and Global Stocks Near Historic Lows for Several Crops...............5
Many Commodity Price Records Established in 2008....................11
Several Futures Prices Set All-Time Highs ........................11
U.S. Farm Prices Projected Record High for Several Crops............15
International Index of Export Prices Record High....................16
Factors Behind the High Prices......................................17
Widespread Weather-Related Crop Shortfalls.......................17
Strong Economic Growth in Developing Countries..................18
Declining Investment in Agricultural Productivity...................18
Weak U.S. Dollar Lowers Cost of U.S. Exports.....................18
Government Biofuels Policy....................................19
Foreign Government Policies to Limit Exports......................22
High Energy Costs............................................24
Macroeconomic Linkages Reinforce Price Rises....................25
Implications of High Commodity Prices...............................26
U.S. Farm Income Record High..................................26
Lower Government Farm Program Outlays.........................26
Crop Insurance Premiums Costs Surge in 2008......................27
Sharply Higher Feed Costs......................................28
Futures Market Dilemma.......................................28
Expanded, More Intensive Agricultural Production..................30
Converting Conservation Acres to Production......................31
Rising Food Price Inflation Impacts Consumer Budgets...............32
High Prices Hurt International Food Aid Prospects...................36
Farm Commodity Market Outlook...................................37
Positive Short-Run Outlook, Especially for Food Crops...............37
Long-Term Outlook Hinges on Productivity Gains...................39
U.S. and International Policy Response................................39
U.S. Industry Groups Decry Rising Costs of Grain as an Input..........40
U.S. Congressional Action......................................41
Immediate International Food Crises Response......................43
Long-Term Agricultural Productivity Response.....................44
Possible World Trade Organization (WTO) Implications..............45
List of Figures
Figure 1. Monthly International Export Prices for Corn, Wheat, and Rice:
January 1990 to May 2008.......................................2
Figure 2. U.S. Season Average Farm Prices for Corn, Soybeans, Wheat,
and Rice: 1960/1961 to 2008/2009................................2
Figure 3. All Wheat: U.S. Season-Average Farm Price vs. End-of-Year
Figure 4. Corn: U.S. Season-Average Farm Price vs. End-of-Year
Figure 5. Barley: U.S. Season-Average Farm Price vs. End-of-Year
Figure 6. Soybeans: U.S. Season-Average Farm Price vs. End-of-Year
Figure 7. Rice: U.S. Season-Average Farm Pricevs. End-of-Year
Figure 8. Cotton: U.S. Season-Average Farm Price vs. End-of-Year
Figure 9. Rough Rice July 2008 Futures Contract Sets All-Time High of
$24.85 per 100 lbs. on April 23, 2008.............................13
Figure 10. Corn July 2009 Futures Contract Sets All-Time High of $6.77
per bushel on May 9, 2008......................................13
Figure 11. 11-Month Moving Average of Price Volatility Index for Corn and
Wheat Futures Prices Since 1980................................14
Figure 12. U.N. FAO Agricultural Export Price Index: 1990 to 2008........17
Figure 13. The U.S. Dollar Has Steadily Weakened Against the Euro,
the Canadian Dollar, and the Australian Dollar Since 2001............19
Figure 14. Energy Costs: Annual Average Prices Since 1975 for Gasoline,
Diesel, and Crude Oil..........................................25
Figure 15. Food Price Index: Month-to-Month Change vs. 11-Month
Moving Average (11-mo MA)...................................33
List of Tables
Table 1. Summary of Global and U.S. Ending Stocks for 2007/2008 and
Table 2. Futures Contract Price Highs, Selected Commodities and Months,
vs. the Recent Five-Year Average Farm Price (AFP).................12
Table 3. U.S. Farm (or Wholesale) Prices: Projected vs. the Previous
Five-Year Average and Prior Record..............................16
Table 4. FAPRI Projections of U.S. Biofuel Policy Impacts...............22
High Agricultural Commodity Prices:
What Are the Issues?
Since late 2007, U.S. and international markets for major grains and oilseeds
have experienced a period of tight supplies, strong demand, and high prices not seen
since the mid-1990s (Figures 1 and 2). While agricultural commodity prices rose
sharply during 2007, they jumped precipitously in early 2008. For example, export
prices for the world’s two major food crops — wheat and rice, rose by 81% and 21%,
respectively, during 2007, but have surged even higher in early 2008. Wheat prices
(HRW No. 2, f.o.b., U.S. Gulf ports) rose 44% between November 2007 and March
2008 — rising from $334.6 per ton to $481.5 — before falling back in April and
May.1 Rice export prices (100% Grade B, f.o.b. Bangkok) have more than doubled
since November 2007, rising from $358.3 per ton to $1,020 in late May 2008 — an
increase of nearly 185%.
This report identifies the predominant factors behind the 2007/2008-crop-year
market conditions for major agricultural commodities, with a focus on U.S. farm
program crops. In addition, it briefly discusses how higher, more volatile commodity
prices have impacted farm incomes, government farm programs, hedging activities,
the livestock and food processing sectors, food prices, and the international food
security situation. It reviews both the near- and longer-term commodity price
outlook, and finally, it discusses various viewpoints and policy options that have
been suggested as possible responses to the perceived causes and consequences of
the unusually high commodity prices.
Because supply and demand circumstances vary widely across these crops —
particularly in terms of their seasonality, their price elasticity, and the derived nature
of their end products — readers are encouraged to review the brief commodity
overviews provided in CRS Report RL33204, Price Determination in Agricultural
Commodity Markets: A Primer, for background information on the underlying nature
of the different commodity markets.2
1 Note that all data are in metric tons unless otherwise stated. These prices are from “World
Food Situation website,” Food and Agricultural Organization (FAO), United Nations, at
[ h t t p : / / www.f a o.or g/ es/ e sc/ e n/ i ndex.ht ml ] .
2 An additional source for more detailed market and policy information for major program
crops may be found at the online briefing rooms maintained by the Economic Research
Service (ERS) of USDA, available at [http://www.ers.usda.gov/briefing].
Figure 1. Monthly International Export Prices for Corn, Wheat, and
Rice: January 1990 to May 2008
1990 1995 20 00 20 05 2010
Source: U.N. FAO, International Commodity Prices. Rice: Thai 100%Grade B, f.o.b. Bangkok; Wheat: U.S. No.2, Hard Red Winter, Gulf;
Corn: U.S. No. 2 Yellow, Gulf.
Figure 2. U.S. Season Average Farm Prices for Corn, Soybeans,
Wheat, and Rice: 1960/1961 to 2008/2009
1960 1970 1980 1990 200 0 2010
Source: NASS and WAOB, WASDE, USDA.
Global Food Crises Declared by United Nations
While the high market prices have been a boon for producers and owners of
agricultural commodities, they represent a drastically worsening food security
outlook for low-income households, particularly those in poor, import-dependent
countries.3 A global crisis was signaled when, on March 20, 2008, Josette Sheeran,
the executive director of the United Nations’ World Food Program (WFP), issued an
appeal for $500 million from donor countries to close an immediate gap in the
WFP’s normal food distribution commitments resulting from rising commodity
prices.4 This was followed on April 14, 2008, by a warning from U.N. Secretary
General Ban Ki-moon that a rapidly escalating global food crisis had reached
emergency proportions and threatened to wipe out seven years of progress in the fight
against poverty.5 World Bank president Robert B. Zoellick announced that the surge
in food prices could push 100 million people living in low-income countries into
deeper poverty.6 That same month the U.N.’s Food and Agricultural Organization
(FAO) identified 37 countries in food crisis requiring external assistance — 21 of
them in Africa.7 Then, on April 22, 2008, barely a month after her first
announcement, executive director Sheeran announced that the WFP’s operation
funding gap had now risen to $755 million, up from the earlier estimate of $500
million, due to continuing increases in commodity prices since mid-March.8
In addition to global food security concerns, higher commodity prices have
stoked the flames of food price inflation and its potentially deleterious effect on
lower-income households while raising costs for livestock feeders and food
processors. Because the rising prices have been associated with unexpectedly large
price volatility, they also have increased the risk and costs of grain merchandising all
along the marketing chain. Finally, the high, volatile commodity prices have
dramatically increased the cost of routine hedging activities (i.e., pricing
commodities for purchase, delivery, or use at some future date) at commodity futures
exchanges and thereby diminished “forward contracting” opportunities for grain and
oilseed producers who are eager to take advantage of record high market prices.
3 For more information on the international food crisis, see CRS Report RL34478, Rising
Food Prices and Global Food Needs: The U.S. Response, by Charles Hanrahan.
4 “WFP Letter of Appeal to Government Donors to Address Critical Funding Gap,” WFP
News Room, March 20, 2008, at [http://www.wfp.org/].
5 “UN Chief: Food Crisis in Now Emergency,” by Edith M. Lederer, Breitbart.com,
April 14, 2008, at [http://www.breitbart.com/article.php?id=D901PT181&show_article=1].
6 “Food Price Crisis Imperils 100 Million in Poor Countries, Zoellick Says,” The World
Bank , News Release, April 14, 2008, at [http://www.worldbank.org/html/extdr/foodprices/].
7 Crop Prospects and Food Situation report, No. 2, April, 2008, FAO, U.N., at [http://www.
fao.org/ gi ews/english/cpfs/index.htm] .
8 “Food Crisis Is Depicted as ‘Silent Tsunami’,” by Kevin Sullivan, Washington Post, April
Not All Commodities Are Equal
The specific circumstances leading to high market prices — e.g., weather-
related supply shortfalls, unexpected surges in demand, market-distorting
government policies — vary in important ways for each of the major U.S. program
crops. For wheat, a combination of international weather-related crop failures over
the past two years that has resulted in historically low U.S. and global stock levels
is the primary impetus behind high prices. Government policies by several key
foreign producers to limit exports in favor of domestic markets also have contributed
to higher prices. For coarse grains and oilseeds, a combination of growing demand
bolstered by rapid income growth in developing markets and government biofuels
policies are the key drivers. For rice, government policies by several major rice
exporting countries since late 2007 to limit exports followed by panic buying on the
part of several import-dependent rice buyers, most notably the Philippines, are the
primary catalysts. For cotton, where global supplies remain relatively abundant, the
general “bull market” mentality that currently dominates global markets for nearly
all commodities has likely been a major contributor to what are otherwise unusually
high prices given cotton’s current supply and demand balance.
Of course, no single event or circumstance fully explains high prices for any
single commodity. Global economic growth, in general, reinforces demand for all
agricultural commodities. Lack of sustained investment in the agricultural sector
diminishes long-term productivity potential, dampens producer incentives, and
contributes to the slow erosion of food supply availability. High prices for one crop
spill over into markets for other crops that compete for the same agricultural land.
A ban on rice or wheat exports by one country ripples through all commodity markets
that compete for the consumer’s food budget. And, as a backdrop, record oil prices
have raised costs all along the various commodity marketing chains from field to
High Prices: A Case of Deja Vu
The last period of similarly high commodity prices occurred in the 1995-1996
period, when several years of government stock reductions were followed by an
unusual combination of global supply-reducing weather events and strong9
international demand. However, current commodity market conditions for major
U.S. farm program crops — which have occurred simultaneously with dramatic price
rises in coffee, cocoa, and tea markets, as well as in non-agricultural markets (e.g,
petroleum, gold, silver, platinum, copper, aluminum, iron ore, and coal) — appear
more reminiscent of the 1972-1974 period, when increasing inflation, gasoline
shortages, and fears of widespread resource depletion appeared to place constraints
on economic growth and food production.
9 For a brief description of these earlier periods, see “Global Grain Markets in 1996: Shades
of 1972-74?” by Pete Riley, Agricultural Outlook, September 1996, pp. 2-6.
In the current farm commodity bull market, global stocks-relative-to-use ratios
for vegetable oils and several grain crops are projected to reach historic lows by mid-
2008 (Table 1). As a result, commodity prices in both cash and futures markets have
approached or surpassed historic highs (Tables 2 and 3) while exhibiting heightened
sensitivity to crop prospects across the globe this year. This sensitivity has translated
into record price volatility in agricultural markets. The full consequences of
historically high, but unpredictably volatile, commodity prices are only beginning to
emerge, but clearly they have raised the cost of doing business and such costs have
not been spread evenly among market participants.
On the positive side, high commodity prices have contributed to record U.S.
farm income in 2007 and the outlook for even higher returns in 2008, while
dramatically reducing government outlays for price-contingent commodity
programs.10 On the other hand, the outlook for sustained high commodity prices has
contributed to the concerns of the U.S. livestock sector and food processors about the
continued timely availability of grain and oilseed supplies, and the impact such high
input prices have had on their profitability. Historic high price levels and volatility
have sharply increased the costs of routine hedging activities of commercial
elevators, grain merchandisers, and food processors. In addition, as commodity
prices have risen in tandem with food prices, consumers from low-income
households and import-dependent nations have expressed concerns, often in the form
of riots, about food price inflation, domestic and international food aid, and the
ability of agricultural producers to meet projections for continued strong demand
U.S. and Global Stocks Near Historic Lows
for Several Crops
U.S. and global stocks for several major U.S. program commodities are
expected to be at or near historically low levels — particularly when measured as a
share of total usage — prior to the next harvest this coming summer and fall of 2008
(Table 1 and Figures 3-8). For example, global end-of-year stocks for coarse grains
and wheat are projected to drop by mid-2008 to the lowest levels since 1977, while
ending stocks of total grains (i.e., rice, wheat, and coarse grains combined) fall to the
lowest level since 1981. More importantly, their respective stocks-to-use ratios are
all projected to reach record lows. Similarly, the stocks-to-use ratios for global corn
and vegetable oils are projected to be the tightest since the early 1970s. Global rice
stocks, as well as the stocks-to-use ratio, are projected up slightly from the previous
year at 77.2 million tons and 18.2% in 2007/2008. However, the previous year’s
stocks-to-use ratio of 18.1% was the lowest since 1976. Current rice stock levels
represent a halving of available supplies from the year 2000, when global ending
stocks peaked at 147.1 million tons.
10 For more information, see CRS Report RS21970, The U.S. Farm Economy.
Table 1. Summary of Global and U.S. Ending Stocks
for 2007/2008 and 2008/2009
St o c k- t o -
Ending Use St o c k- t o - U se
CommodityStocksRatio Ending StocksRatio
Cha nge Lo w-
Millio n Millio n fr o m est
Tons% Tons2006/2007% Since
Wheat 124.0 16% 110.0 -11% 15% record
So yb eans na na 49.0 0 % 16% 2003
Co tto n na na 13.4 -2% 38% 2003
Wheat 13.1 22% 6.5 -47% 10% 1946
Co rn 19.4 6 % 35.1 6 % 11% 2003
Rice 0.5 8 % 0 .7 -45% 9% 1974
So yb eans na na 4 .4 10% 5% 2003
Co tto n na na 2 .2 4% 53% 2005
Source: USDA, PSD data base, May 2008.
Note: The 2007 crop year covers the period from the start of the 2007 harvest to the start of the 2008
harvest. Thus, ending stocks for the 2007 crop represent supplies available in 2008 just prior to the
harvest for the 2008 crop. Similarly, the stocks-to-use ratio for the 2007 crop is a measure of available
supplies relative to use just prior to the harvest of the 2008 crop.
a. USDA’s PSD database for global commodities extends back to 1960; thus, “lowest on record”
means the lowest data point” since 1960.
b. USDA domestic data extends back prior to 1900 for most commodities.
c. Total grains include coarse grains, wheat, and rice.
d. Coarse grains include corn, sorghum, barley, oats, and rye.
e. Rice stocks in 2006 were the lowest since 1976.
A certain amount of stocks at the end of the marketing year are necessary to
provide a continuous flow of grain to processors and exporters before the new crop
is harvested — such stocks are referred to as pipeline supplies. Although there is no
hard and fast rule on what volume of stocks represents desirable pipeline levels for
the major grain and oilseed crops, whenever stocks approach historically low levels
market analysts speculate about what pipeline-stock levels might be. For wheat, U.S.
pipeline stocks are estimated to be in a range of 9.5 to 11 million tons (350 to 400
million bushels); for corn, 10 to 12 million tons (400 to 500 million bushels); and for
soybeans, about 4 to 5.5 million tons (150 to 200 million bushels).11 Whenever
USDA ending stock projections approach these levels, market prices become very
sensitive to unexpected market news and prices tend to be more volatile than during
periods of abundant stocks.
U.S. wheat ending stocks for 2007/2008 are projected to fall to their lowest level
(239 million bushels or 6.5 million tons) since 1947 — well below their pipeline
range. U.S. soybean stocks of 4.4 million tons are projected at the lower end of their
pipeline range. U.S. corn ending stocks, although projected at what would appear to
be an ample level, are low in historical global supply-to-use terms. Furthermore, the
multi-year outlook for corn supplies is strongly impacted by the biofuels usage
mandate in the Energy Independence and Security Act of 2007 (P.L. 110-140), which
suggests that corn supplies will continue to tighten through 2015. Among the major
program crops, cotton is the principal exception, with global and U.S. ending stocks
projected at relatively abundant levels. In 2008/2009, USDA projects that global
coarse grain stocks will continue to tighten, while wheat and rice stocks rebuild
slightly on the outlook for record harvests.
Ending stocks are calculated as the difference between total supplies (beginning
stocks plus production plus imports) and total disappearance (all domestic uses plus
exports). As such, season-ending stocks of an annually produced commodity
summarize the effects of both supply and demand factors during the marketing year.
Expected ending stocks — expressed as a ratio over expected total use — are
frequently used as an indicator of a commodity’s expected price outcome by USDA
and other market observers.12 For most seasonal commodities, annual prices tend to
have a strong negative correlation with their ending stocks-to-use ratio (Figures 3-8).
As a result, expectations for high stocks relative to use typically result in lower
prices, while expectations for low stocks relative to use tend to raise prices.
11 Pipeline ranges are derived by CRS from various sources.
12 For more information, see CRS Report RL33204, Price Determination in Agricultural
Commodity Markets: A Primer, by Randy Schnepf.
Figure 3. All Wheat: U.S. Season-Average Farm Price
vs. End-of-Year Stocks-to-Use Ratio
19 70 19 80 19 90 20 00 20 10
Source: 1970-2006:USDA, ERS, Wheat Briefing Room data;2007:WASDE, May 9, 2008.
Figure 4. Corn: U.S. Season-Average Farm Price
vs. End-of-Year Stocks-to-Use Ratio
19 70 19 80 19 90 20 00 20 10
Source: 1970-2006:USDA, ERS, CornBriefing Room data;2007:WASDE, May 9, 2008.
Figure 5. Barley: U.S. Season-Average Farm Price
vs. End-of-Year Stocks-to-Use Ratio
19 70 19 80 19 90 20 00 20 10
Source: 1970-2006:USDA, ERS, Corn Briefing Room data;2007:WASDE, May 9, 2008.
Figure 6. Soybeans: U.S. Season-Average Farm Price
vs. End-of-Year Stocks-to-Use Ratio
WASDE, May 9, 2008.
Figure 7. Rice: U.S. Season-Average Farm Price
vs. End-of-Year Stocks-to-Use Ratio
WASDE, May 9, 2008.
Figure 8. Cotton: U.S. Season-Average Farm Price
vs. End-of-Year Stocks-to-Use Ratio
19 70 19 80 19 90 20 00 20 10
Source: 1970-2006:USDA, ERS, Cotton Briefing Room data; 2007:WASDE, May 9, 2008; and 2008-09 FAPRI 2008 baseline.
Many Commodity Price Records
Established in 2008
The tight supply situation for many agricultural commodities has sparked higher
commodity prices throughout the global marketing chain — farm gate, futures
markets, major international ports of call, wholesale distribution points, and finally
to retail prices. However, not all prices respond with the same speed and volatility.
Prices for electronically-traded agricultural futures market contracts respond almost
instantaneously to new market information. In contrast, farm prices are weighted by
markets — a large share of which occur immediately after harvest, when prices are
generally at their lowest point of the season — and often respond more to local rather
than international market conditions. Wholesale and export market prices fall
somewhere between farm and futures market prices in terms of their responsiveness
to changing conditions.
Several Futures Prices Set All-Time Highs
Unlike cash markets which deal with the immediate transfer of goods, a futures
exchange provides the facilities for buyers and sellers to trade commodity futures
contracts — that is, contracts to buy (or sell) a specified volume of a commodity,
subject to detailed quality conditions, at a fixed price for potential physical delivery
(or acquisition) at some future date. Commodity futures exchanges are important
barometers of commodity price movements — both the general level as well as the
volatility — because they function as a central exchange for domestic and
international market information. Market participants are able to respond with buy
or sell orders within seconds upon receiving new information. As a result, futures
contract prices react almost instantaneously to new information regarding commodity
supply and demand expectations. This futures market activity (e.g., price, volume,
open interest) is then reported electronically by the major exchanges through their13
own news media, as well as through national and international news media. As a
result of this transparency, futures exchanges have served two critical roles — price
discovery and risk management — in facilitating the marketing of agricultural
The market circumstances of the first few months in 2008 have clearly
manifested themselves in the commodity futures exchanges, where prices for many
commodities have hit historic all-time highs (Table 2). For example, at the Chicago
Board of Trade (CBOT), prices for nearby futures contracts for corn, wheat,
soybeans, soybean oil, and rice reached all-time highs in early March 2008.14 Corn
and rice contracts have remained particularly active, pushing to new contract highs
on almost a daily basis during April and into May (Figures 9 and 10).
13 For more information on agricultural futures exchanges, see CRS Report RL33204, Price
Determination in Agricultural Commodity Markets: A Primer.
14 CBOT daily futures contract price quotes are available at [http://www.cbot.com].
Table 2. Futures Contract Price Highs, Selected Commodities
and Months, vs. the Recent Five-Year Average Farm Price (AFP)
CommodityExchangesUnitMonth / YRDateHigh PriceAFP
Wheat: HRSMGEXbushelsMarch 082/25/08$25.00c$3.70
Previous highMay 965/10/96$7.32
Wheat: HRWKCBOTbushelsMarch 082/27/08$13.70c$3.54
Previous highMay 964/26/96$7.44
Wheat: SRWCBOTbushelsMarch 082/27/08$13.35$3.28
Previous highJuly 963/20/96$7.50
Previous highJuly 967/12/96$5.55
Previous highJuly 736/5/73$12.90
Soybean oilCBOTpoundsMarch 083/3/08$0.708$0.236e
Previous highOctober 7410/1/74$0.510
Soybean mealCBOTshort tonMarch 083/3/08$385.70$193.6e
Previous highJuly 736/5/73$451.00
Previous highMarch 971/31/97$12.45
Source: Futures contract prices are reported daily by the various futures exchanges and reprinted in
the Wall Street Journal; farm prices are from NASS, USDA; and cash prices are from AMS, USDA.
a. MGEX = Minneapolis Grain Exchange; KCBOT=Kansas City Board of Trade; and
CBOT=Chicago Board of Trade; cwt = hundredweight (i.e., 100 lbs.).
b. Record price for each contract month with the exception of the July soybean meal futures contract.
c. Record price: any futures contract month for this commodity at this exchange as of May 27, 2008.
d. Simple average of monthly farm prices received for the five-year period 2002/2003 through
e. Simple average of monthly cash prices; Decatur, Illinois.
Figure 9. Rough Rice July 2008 Futures Contract Sets All-Time High
of $24.85 per 100 lbs. on April 23, 2008
Note: Futures market price data is presented as weekly price ranges with the left tick representing the
week’s opening price and the right tick representing the week’s final settlement price.
Figure 10. Corn July 2009 Futures Contract Sets All-Time High of
$6.77 per bushel on May 9, 2008
Note: Futures market price data is presented as weekly price ranges with the left tick representing the
week’s opening price and the right tick representing the week’s final settlement price.
Heightened Commodity Price Volatility Since 2005. As commodity
price levels have moved higher over the past two years in response to the gradual
tightening of global supplies, they also have exhibited unprecedented volatility in the
range of daily price movements, swinging rapidly up and down in response to the
arrival of new market information. For example, according to a CBOT volatility
index (of day-to-day price movements converted to an annual basis), corn and wheat
futures contract price volatility indexes have averaged 19.7% and 22.2% since 1980
(Figure 11).15 However, in 2006 and 2007, both corn and wheat price movements
have produced successive record annual volatility measures of 28.8% and 31.4% for
corn, respectively, and 30.4% and 32.7% for wheat.16
Both the price level and volatility for most agricultural commodities have
continued to rise in 2008. During March 2008, CBOT’s monthly average price
volatility (expressed on an annualized basis) for wheat was 73%, corn 41%, soybeans
Figure 11. 11-Month Moving Average of Price Volatility Index for
Corn and Wheat Futures Prices Since 1980
Price Volatility Index (%)
20W h eat
198019851990199520002005Source: Chicago Mercantile Exchange (CME) Group, datamine,
Historical Price Volatility; [wwww.cmegroup.com/].
15 The price volatility index is a measurement of the day-day change in price. It is expressed
as a percentage and computed as the annualized standard deviation of the percentage change
in daily price.
16 Chicago Mercantile Exchange (CME) Group, Datamine, Historical Volatility Measures,
[ h t t p : / / www.cmegr oup.com/ ] .
U.S. Farm Prices Projected Record High for Several Crops
As a result of the commodity price increases of the past several months, USDA
is projecting record high season-average farm prices for nearly all of the major
program crops — wheat, rice, corn, sorghum, barley, soybeans, and soybean products
(soybean oil and soybean meal) — for the current 2007/2008 crop year, while farm
prices for rice are expected to be the highest since 1973 (Table 3). Prices for minor
oilseeds (e.g., sunflower and rapeseed), oats, and hay crops also are projected to
approach or surpass previous record highs. Furthermore, USDA expects the
relatively tight U.S. and international market conditions to prevail through 2008 as
well and generate still higher farm prices in the 2008/2009 marketing year.
USDA’s farm price estimates are weighted by monthly marketings. Since a
large portion of each crop is marketed within two to three months of harvest, when
seasonal prices are generally at their lowest level, the season average farm price
(SAFP) is weighted downward by a large volume of lower-priced early marketings.
Also, USDA reports farm prices on a monthly basis, not daily like the major
commodity futures exchanges. As a result, the monthly farm prices reported by
USDA do not exhibit the same degree of volatility as that of the futures prices
reported in the news media. For examples, see the discussion in the earlier section
on futures contract prices and compare the record futures contract prices for the
major program crops reported in Table 2 with the farm prices reported in Table 3.
Although the establishment of record highs for grain and oilseed program crops
is noteworthy, the extent to which the 2008/2009 prices deviate from both the
average prices of the preceding five-year period and the previous record SAFPs has
evoked concern and even alarm from consumer and hunger advocates. For example,
the 2008/2009 corn SAFP mid-point of $5.50 per bushel is projected to be nearly
132% above the previous five-year average farm price of $2.37 and about 70% above
the previous record high $3.24 achieved in 1995/1996. Most grains and oilseeds are
projected at least 55% to 155% above the previous five-year average price. For
example, rice is projected 155% above its five-year average. Even cotton, a
relatively abundant commodity, is projected 34% above its previous five-year
Recent (March 2008) long-run commodity price projections from the Food and
Agricultural Policy Research Institute (FAPRI) suggest that, when commodity
markets return to equilibrium, the long-run average price for major program crops
will settle at levels that are 19% to 110% above the recent five-year average.
Table 3. U.S. Farm (or Wholesale) Prices: Projected vs. the
Previous Five-Year Average and Prior Record
Proj. d2007/2008 tof
(5YA)caCropa% ofAvg.% of
Cro p Units PricePrice Yea r Price 5YA Price 5YA
All Wheat$/ bu.$4.5595/96$3.61$7.35204%$5.51153%
Soy Oil¢ /lb.31.6¢73/7426.0¢52.0¢201%54.6¢210%
$/s.t. 0 96/97 $200.10 0 155% 1 119%
Rice $/cwt $13.80 73/74 $7.46 $19.00 255% $11.54 155%
Upl. Cotton¢ /lb.76.5¢95/9648.4¢64.8¢e134%62.0¢128%
Notes: s.t. = short ton; cwt = hundred pounds.
a. Season average farm price received (SAFP) for all wheat, corn, sorghum, barely, soybeans, rice, and
upland cotton, National Agricultural Statistics Service (NASS), USDA; season average annual
wholesale prices for soybean oil and soybean meal, Decatur, Illinois, Agricultural Marketing
Service (AMS), USDA.
b. Record prior to the 2007/2008 or 2008/2009 marketing year records.
c. Simple average of SAFPs or wholesale prices for the 2002/2003 to 2006/2007 period.
d. Mid-point of projected price range; WASDE Report, May 9, 2008, WAOB, USDA.
e. Projection from U.S. Baseline Briefing Book, FAPRI-MU Report #03-08, March 2008.
f. Average for the 10-year projection period, 2007/2008 to 2017/2018, FAPRI-MU Report #03-08,
International Index of Export Prices Record High
According to the United Nations’ Food and Agricultural Organization (FAO),
export prices for major agricultural commodities rose 34% rise in 2006 and another
23% during 2007 (Figure 12).17 Furthermore, the FAO’s food price index indicates
that food prices in the international marketplace have jumped nearly 18% during the
first three months of 2008, driven largely by price rises in cereals (up 27%) and oils
(up 26%). This rapid price rise is evidenced by the direction of major export prices
for wheat, corn, and rice in Figure 1. FAO predicts that the cereal import bill for the
world’s poorest countries will rise by 56% in 2007/2008, following a 37% increase
17 World Food Situation, Food Price Indices, FAO, April 2008, at [http://www.fao.org/
18 “Poorest Countries’ Cereal Bill Continues to Soar, Governments Try to Limit Impact,”
FAO Newsroom, FAO, April 11, 2008.
Figure 12. U.N. FAO Agricultural Export Price Index: 1990 to 2008
2000 200 2 2004 2006 2008 2010
Source: U.N. FAO, 2008 is based on data through mid-April.
Factors Behind the High Prices
Rising food prices, which are affecting millions of people, are rooted in what
Josette Sheeran, Executive Director of the WFP, has described as a “perfect storm”
of increasing demand for food from emerging economies, competition between
biofuels and food production, high fuel prices, and increasing climatic shocks such19
as droughts and floods. Further contributing to high commodity prices have been
a series of international government policies to limit domestic export supplies that
have heightened fears of shortage and a weak U.S. dollar that has made U.S. exports
more competitive in international markets. The market effects of these factors have
been particularly acute for agricultural commodities because of the inelastic nature
of both supply and demand.20
Widespread Weather-Related Crop Shortfalls
Global grain production declined in both 2005 and 2006 — primarily due to
declining global productivity — cutting into existing stocks and reducing exportable
supplies. A major tipping point occurred in 2007 when Australia — traditionally a
major wheat and barley exporter — suffered a second consecutive year of sharply
lower grain production due to drought. With stocks already low, Australia’s 2007
grain exports were dramatically curtailed for a second year. Meanwhile, grain crops
in the United States, Canada, European Union (EU), Eastern Europe, and some
19 Statement given at the “Inaugural Ceremony: 30th Anniversary Session of IFAD’s
Governing Council,” by Josette Sheeran, Executive Director, WFP, February 13, 2008.
20 For more information, see CRS Report RL33204, Price Determination in Agricultural
Commodity Markets: A Primer, “Price-Inelastic Demand and Supply,” p. 23.
countries of the former Soviet Union were also reduced by weather conditions. In
the EU, declining grain supplies forced livestock producers to import substantial
volumes of wheat and other feed grains for feed rations. As a result, the EU switched
from its traditional status as a major net exporter of grains into a net importer in
2007. The cumulation of these events severely drew down global grain supplies
Strong Economic Growth in Developing Countries
A steadily increasing world population, boosted by robust growth in purchasing
power, especially in developing countries such as China and India, has contributed21
to a permanent increase in global demand for more and different kinds of food. As
households improve their incomes and food purchasing power, they shift their
demand away from traditional staples and toward higher-value foods like meat and
dairy products.22 This dietary shift is leading to increased demand for grains used to
Declining Investment in Agricultural Productivity
Several years of under-investment in the agricultural sectors of many developing
countries have resulted in slowing or stagnant yield growth.23 This malaise has
resulted, in part, from a redirecting of international donor community funds away
form rural development and agricultural productivity. The result has been
population-driven demand growth outpacing crop yields over several years and
drawing down global agricultural surplus stocks.
Weak U.S. Dollar Lowers Cost of U.S. Exports
When the U.S. dollar declines in value in international exchange markets
relative to the currency of our export competitors (e.g., Canada, Australia, or the EU)
or importing nations (e.g., Japan, Taiwan, etc.), it makes U.S. export products
cheaper and, therefore, more competitive. Since January 2002, the U.S. dollar has
lost over 44% of its value against the EU’s euro and the Australian dollar, and nearly
21 For more information on GDP and population growth in the developing world, see USDA
Agricultural Projections to 2017, OCE-2008-1, USDA, pp. 12-13.
22 Rising Food Prices: What Should Be Done?, Joachim von Braun, International Food
Policy Research Institute Policy Brief, April 2008.
24 For more information, see CRS Report RL31985, Weak Dollar, Strong Dollar: Causes
and Consequences by Craig K. Elwell.
Figure 13. The U.S. Dollar Has Steadily Weakened Against the Euro,
the Canadian Dollar, and the Australian Dollar Since 2001
19 98 20 00 20 02 20 04 20 06 20 08
Source: Monthly exchange rates, Pacifica Exchange Rate Service.
A key result of the declining value of the U.S. dollar has been a dramatic surge
in U.S. exports of agricultural products, particularly of bulk commodities. Total U.S.
agricultural exports in FY2008 are estimated at a record $101 billion, including
record bulk shipments of $44.7 billion and 135.8 million tons.25 In terms of year-to-
year export volumes, U.S. corn exports are projected up nearly 18% to a record 2.5
billion bushels (63.5 million tons) in the 2007/2008 marketing year, wheat exports
are projected up 40%, sorghum exports 82%, and rice exports 23%. These record
shipments of grains and oilseeds have helped to draw down U.S. stocks and fuel
higher commodity prices.
Record exports in the face of historically high commodity prices seems
somewhat counterintuitive. However, the decline in the foreign exchange value of
the U.S. dollar has been so dramatic that, in some cases, it has completely offset the
rise in commodity prices, thereby making U.S. grains and oilseed very attractive.
Government Biofuels Policy
Concerns over high oil prices, energy security and climate change have
prompted governments to take a more proactive stance towards encouraging the
production and use of agriculture-based biofuels.26 Several countries have set
standards or targets for use of biofuels. The largest biofuels programs are in the
United States, Brazil, and the EU. Brazil requires a minimum use of 20%-25% of
25 Outlook for U.S. Agricultural Trade, AES-57, February 21, 2008, at [http://usda.mannlib.
cornell.edu/usda/current/AES/AES-02-21-2008.pdf]. Bulk shipments include wheat, rice,
feed grains, soybeans (and other oilseeds), cotton and linters, and tobacco.
26 For more information, see CRS Report RL32712, Agriculture-Based Renewable Energy
sugar-cane-based ethanol (E20-E25) in its national gasoline supply, and has
subsidized the establishment of a national distribution network that includes pumps
for 100% ethanol in addition to the E20-E25 blend. In addition, Brazil requires that
all diesel oil contain a 2% blend of biodiesel by 2008 rising to a 5% blend by 2013.
The EU has established a goal of 5.75% of motor fuel use from biofuels by 2010,
rising to 10% by 2020. The EU’s program is primarily focused on vegetable-oil-
based biodiesel production. As a result of its biofuels policy, EU farm policy
incentives have generally favored the expansion of rapeseed production at the
expense of wheat, barley, and other grain crops. Thailand, India, and China also have
established biofuel mandates that hinge on the expansion of agriculture-based
biofuels. However, these three countries have at least temporarily suspended their
biofuels programs in light of the current high commodity prices and global food
U.S. Biofuels Mandate. In the United States, the Energy Independence and
Security Act of 2007 (EISA; P.L. 110-140) extended and substantially expanded the27
existing Renewable Fuel Standards (RFS). The RFS is a usage requirement
mandating that an increasing volume of biofuels be blended with conventional fuels.
Under EISA, the RFS mandates the use of at least 9 billion gallons of biofuel in U.S.
fuel supplies in 2009, but grows quickly to 20.5 billion gallons by 2015 and to 36
billion gallons by 2022. The U.S. biofuels sector is also supported by a tax credit of
$0.51 for every gallon of ethanol blended in the U.S. fuel supply ($1.00 per gallon
of virgin-oil-based biodiesel), and an import tariff of $0.54 per gallon of imported
ethanol.28 In addition, several federally-subsidized grant and loan programs assist
biofuels research and infrastructure development.
Current U.S. biofuel production is almost entirely corn-based ethanol — nearly
6.5 billion gallons of corn-ethanol were produced in 2007, compared with an
estimated 450 million gallons of biodiesel. The RFS for corn-based ethanol is
capped at 15 billion gallons in 2015. However, additional mandates for biodiesel and
for cellulosic and other non-corn ethanol continue to expand to a total RFS of 36
billion gallons by 2022. This mandate places tremendous pressures on U.S. and
global crop production systems. This crop year (2007/2008), USDA estimates that
about 24% of the U.S. corn crop will be used to produce ethanol; however, this share
is projected to grow to 33% next year. This rapid, “permanent” increase in corn
demand has directly sparked substantially higher corn prices to bid available supplies
away from other uses — primarily livestock feed. Higher corn prices, in turn, have
forced soybean, wheat, and other grain prices higher in a bidding war for available
27 For more information, see CRS Report RL32712, Agriculture-Based Renewable Fuels,
and CRS Report RL34265, Selected Issues Related to an Expansion of the Renewable Fuel
28 An exception to the tariff exists under the Caribbean Basin Initiative; see CRS Report
RS21930, Ethanol Imports and the Caribbean Basin Initiative.
This bidding war is being played out in global markets as traditional corn users
search for alternative feed grain supplies. According to the World Bank, increased
biofuel production has been one of the principal causes of the dramatic rise in food
prices — almost all of the increase in global corn production from 2004 to 2007 (the
period when grain prices rose sharply) went for biofuels production in the United
S t at es. 29
Economic Analysis of U.S. Biofuels Mandate. A recent study by the
Food and Agricultural Policy Research Institute (FAPRI) attempts to measure the
pure and joint price effects of the U.S. biofuels RFS and the tax credits (Table 4).30
FAPRI’s study suggests that implementation of EISA’s RFS (in the absence of the
tax credit) will raise corn price by about 19% once the new long-run equilibrium has
been established. The FAPRI study also estimates that the ethanol tax credit (TC) of
$0.51 per gallon (in the absence of the RFS) supports corn prices by a slightly smaller
11%. Because of interactions between the two subsidies, it is estimated that joint
implementation of both the RFS and TC supports corn prices by about 20%.
Strong effects were also observed by FAPRI for other commodities, particularly
soybean oil whose wholesale price is projected 73% higher under the joint RFS-TC
scenario (Table 4). A substantial portion of corn price effects are likely transmitted
to the soybean market via competition for land, primarily in the Corn Belt where
soybeans and corn are both widely grown. The biofuels price effects would also
transmit to regions outside of the Corn Belt (where wheat, cotton, and other major
grain and oilseeds are produced) as farmers reconfigure their planting decisions and
opt for greater soybean and corn production to maximize returns.
A similar study by the Center for Agricultural Research and Development
(CARD) found that, jointly, the RFS and TC supported the price of corn by a slightly
smaller 16%.31 Both of these studies found the results to be highly dependent on the
price of petroleum (or gasoline). Higher petroleum prices substitute for government
incentives and diminish the relative impact of such incentives on corn prices. Neither
study evaluated the effect of the U.S. import tariff of $0.54 per gallon on imported
ethanol from Brazil, although the CARD study pointed out that the corn price
impacts would be greater if the tariff on Brazilian ethanol were eliminated. Nor did
either study include the effects of the various grants and subsidized loans that have
been made available to the U.S. biofuels sector for research and infrastructure
29 “Rising Food Prices: Policy Options and World Bank Response,” World Bank, undated
mimeo, at [http://www.worldbank.org/].
30 “The Energy Independence and Security Act of 2007: Preliminary Evaluation of Selected
Provisions,” FAPRI-MU #01-08, January 2008.
31 “The Outlook for Corn Prices in the 2008 Marketing Year,” Iowa Ag Review, Spring 2008,
Vol. 14, No. 2, pp. 4-5; and “Ethanol, Mandates, and Drought: Insights from a Stochastic
Equilibrium Model of the U.S. Corn Market,” by Lihong Lu McPhail and Bruce A.
Babcock, Working Paper 08-WP 464, CARD, Iowa State University, March 2008.
Table 4. FAPRI Projections of U.S. Biofuel Policy Impacts
Scenario: Projections and % Changea
No RFSNo RFSRFSRFS
UnitsNo TCTCNo TCTC
P r o duct io n
Wheat $/bu. 4 .03 4 .19 4 % 4 .31 7 % 4 .33 7 %
Source: “The Energy Independence and Security Act of 2007: Preliminary Evaluation of Selected
Provisions,” FAPRI-MU #01-08, January 2008.
Notes: The numbers presented in this table are the averages of the scenario projections for the 2011
to 2016 period, thus, they are an estimate of the long-run equilibrium values. The “No RFS; TC
extended” scenario represents FAPRI’s December 2007 baseline projections.
a. RFS = Renewable Fuel Standard; TC = Tax Credit.
CARD Director Bruce Babcock suggests that there is an important difference
between the short-run and long-run impacts of federal biofuels policy.32 In the short-
run, federal incentives encourage the construction of new ethanol plants. Once built,
U.S. ethanol plants will not simply shut-down if the federal incentives disappear.
Instead, they will continue to produce ethanol as long as they are able to cover their
operating expenses. Thus, a reversal of U.S. biofuels policy will not necessarily
result in a reversal of the ethanol sector’s impact on corn prices and commodity
markets. In the long run, Babcock says that the impacts of federal biofuels policy
depend crucially on the price of crude oil and the number of ethanol plants that get
constructed under current incentives. This is because agricultural commodity prices
and gasoline prices are now inextricably linked through existing ethanol plants and
the knowledge of how to efficiently convert corn to transportation fuel.
Foreign Government Policies to Limit Exports
Foreign government policy responses to the high commodity prices have, for the
most part, had the perverse effect of reinforcing higher prices thereby contributing
to, rather than alleviating, the current market supply-and-demand conditions.
32 “Statement before the U.S. Senate Committee on Homeland Security and Government
Affairs,” Bruce Babcock, Director of CARD, Hearing on Fuel Subsidies and Impact on Food
Prices, May 7, 2008.
Since late 2007, several traditional wheat and rice exporting countries — in an
effort to ensure domestic food availability and temper rising internal inflation —
have instituted policies designed to limit exports of domestic supplies. These
policies, albeit implemented to dampen internal prices for domestic consumers, have
had exactly the opposite effect on international market prices, pushing them higher
than supply and demand conditions would otherwise dictate by limiting access to
available supplies by international buyers. On April 24, 2008, the WFP claimed that
more than 40 food-exporting countries had placed some kind of restriction or outright
ban on many crop exports in an attempt to stabilize prices within their borders.33
Export bans have had a particularly acute effect in the thinly traded international
rice market. Traditionally, less than 7% of annual global rice production enters world
markets. As a result, removal of even modest volumes of exportable supplies can
have profound effects. Since late 2007, four traditional exporters including Vietnam,
India, China, and Egypt, (the world’s second-, fourth-, sixth-, and eighth-leading rice
exporters last year), along with minor exporter Cambodia, have all set in place
policies to limit exports. The combined effect of these bans is to remove over a third
of available export supplies from world markets and to drive international rice prices
sharply higher. The removal of these supplies was followed by panic buying by the
Philippines as it aggressively sought to acquire a share of remaining exportable
Similar action in the international wheat market includes both Ukraine and
Argentina which, in the spring of 2007, initiated wheat export restrictions in efforts
to control food price inflation. Pakistan placed taxes on wheat exports. By late
February 2008, Kazakhstan officials set in place policies to slow their country’s
wheat export pace (via higher custom duties), also due to declining supplies.35 By
mid-April, Kazakhstan had converted its export slowdown into an outright ban.
Argentina’s government policy of banning wheat and beef exports, slowing corn
exports through procedural barriers at customs, and heavily taxing exports of
soybeans36 (both to limit exports and to raise government revenues) is particularly
noteworthy for three reasons. First, the export controls resulted in a nationwide
farmers’ strike whereby producers refused to bring to market any agricultural
products. Second, although the strike (after lasting three weeks) was temporarily
suspended for 30 days starting on April 3, 2008,37 in an agreement between farmers
and government that essentially left the export controls in place, the uncertainty
33 Nathanial Gronewold, “Food Prices Hampering U.N. Agency’s Ability to Head Off ‘New
Face of Hunger,’” E&E News PM, April 24, 2008, at [http://www.eenews.net].
34 “Japan, China, and Thailand can Solve the Rice Crisis — But U.S. Leadership is Needed,”
by Tom Slayton and C. Peter Timmer, CGD Notes, Center for Global Development, May
35 “Wheat Jumps on Supply Concerns,” Stevenson Jacobs, Washingtonpost.com, February
36 “Argentina Suspends Wheat Exports Indefinitely,” Commodity Online, April 22, 2008.
37 “Farmers’ Strike in Argentina Is Suspended for Negotiations,” by Vinod Sreeharsha and
Alexei Barrionuevo, New York Times, April 3, 2008.
surrounding Argentina as a reliable export supplier resulted in a substantial amount
of purchase contracts being diverted to U.S. suppliers. Thus, already huge U.S.
export numbers were further bolstered by the shift in demand from Argentinean to
U.S. commodities. Third, Argentina’s strict export controls have had a major impact
on that country’s agricultural prospects, at least in the short run, as most market
analysts are now predicting a significant decline in Argentina’s planted area for
wheat (and possibly corn and soybeans) in 2008.38
Alternately, on the demand side, several countries that either depend on imports
to meet an important share of their domestic food needs, or have large groups of
nutritionally vulnerable people, began to remove long-standing barriers to imports.39
For example, in late March 2008, India authorized duty-free imports of rice. Several
other Asian, African, Latin American, and Caribbean nations have also lowered or
eliminated tariffs on a range of imported foodstuffs. In addition, many countries
froze internal commodity prices at below market levels and issued temporary income
subsidies to help consumers meet their food needs. While these consumer-oriented
actions may be laudable, they have had the effect of increasing international demand
at the same time that international supplies are being restricted.
High Energy Costs
Petroleum prices have doubled since January 2007 when the monthly spot
market price for West Texas Intermediate (WTI) at Cushing, Oklahoma, averaged
$53.70 per barrel (Figure 14). By late May, 2008, the price for WTI exceeded a
record $130 per barrel. Since gasoline, diesel fuel, and other energy products are
either directly or indirectly derived from petroleum, high petroleum prices have
increased operating costs all along the marketing chain for agricultural inputs and
outputs, thus inflating prices everywhere. Energy-driven higher marketing costs
accumulate at the retail outlet where they translate directly into higher consumer food
High petroleum prices and strong demand for ocean shipping drove ocean rates
for shipping bulk commodities to record levels in 2007, nearly doubling the previous
record set in 2004, and adding to the imported cost of internationally traded
products.40 WFP executive director Sheeran has suggested that high oil prices may
be the single most important factor in driving up food costs because, in addition to
its effect on raising energy costs throughout the marketing chain, it has boosted the41
popularity of biofuels.
38 “Argentine Soybean Output May Slip; Protests May Pause,” by Heather Walsh and Eliana
Raszewski, Bloomberg News, March 19, 2008.
39 Crop Prospects and Food Situation, No. 2, April 2008, FAO, U.N., at [http://www.
40 Grain Transportation Report, Agricultural Marketing Service, USDA, April 17, 2008.
41 Nathanial Gronewold, “Food Prices Hampering U.N. Agency’s Ability to Head Off ‘New
Face of Hunger’,” E&E News PM, April 24, 2008, at [http://www.eenews.net].
Figure 14. Energy Costs: Annual Average Prices Since 1975 for
Gasoline, Diesel, and Crude Oil
1 975 1985 1995 2005
Source: Gasoline, Unleaded Regular, U.S. City Average; Diesel:, No. 2,Retail Sales; Crude Oil, West Texas Intermediate, Cushing, OK;Energy
Information Agency, Dept of Energy.
Macroeconomic Linkages Reinforce Price Rises
Several economists have stated that U.S. fiscal policies intended to stave off
economic recession have contributed indirectly to the U.S. and global “food crises”
by resulting in a weaker U.S. dollar. Between September 2007 and April 2008, the
U.S. Federal Reserve’s Open Market Committee cut a key interest rate (the federal
funds rate) by 3.25 percentage points to 2%, primarily due the escalating financial
crisis related to the rise in defaults on subprime mortgages and the overall weak U.S.
economy.42 Lower U.S. interest rates contribute to a decline in the value of the dollar
relative to other currencies which, in turn, contributes to higher U.S. commodity
exports and higher oil prices.
Since oil is priced in U.S. dollars in international markets, a weakening dollar
is generally perceived as contributing to higher oil prices via two mechanisms. First,
oil exporters must raise the dollar price per barrel to retain the same level of purchase
power against appreciating non-U.S. currencies. Second, oil importers — whose
currencies have generally strengthened against the dollar — drive the dollar price of
oil higher when they bid the same price per barrel in their own currency. Since the
United States is the world’s largest oil importer, surging oil import costs pressure the
U.S. trade deficit and ripple through the U.S. economy further slowing economic
activity. The weakening U.S. economy has impacted capital and stock market prices.
As a result, the bullish commodity markets have become an attractive market for
mutual funds and investors seeking more profitable investment opportunities. This
42 “Open Market Operations,” Federal Open Market Committee, U.S. Federal Reserve
Board, at [http://www.federalreserve.gov/fomc/fundsrate.htm]; see also CRS Report 98-856,
Federal Reserve Interest Rate Changes: 2000-2008, by Marc Labonte and Gail E. Makinen.
“speculative” investment money — valued in the hundreds of billions of dollars —
has been accused of reinforcing rising prices.43 Some analysts suggest that
agricultural commodity markets are now playing a role traditionally reserved for gold
and other precious metals — a safe haven for investors.44
Implications of High Commodity Prices
U.S. Farm Income Record High
The past six years are the six highest farm income years on record, but the past
two years in particular have seen significant gains from previous records.45
According to USDA’s Economic Research Service (ERS), national net farm cash
income — a key indicator of U.S. farm well-being — is expected to rise to a record
$96.6 billion in 2008, over 10% above the previous year’s record ($87.6 billion) and
26% above the four-year average of $76.5 billion for 2003 through 2006, all on the
strength of higher commodity prices. Farm revenue gains are expected to easily
outpace rising input expenses (up 34% versus 29%, respectively, from the 2000-2006
period average), leaving many farm communities flush with cash.
Lower Government Farm Program Outlays
In February, USDA forecast government direct payments at $13.4 billion in
2006) average of $17.4 billion.46 Government direct payments peaked at $24.4
billion in 2005. Higher projected market prices are expected to limit payments under
the two major price-triggered programs — counter-cyclical payments (CCP), and
marketing loan benefits (loan deficiency payments, marketing loan gains, and
certificate exchange gains).47 Fixed direct payments, whose payment rates are fixed
in legislation and are not affected by the level of program crop production or prices,
are estimated up slightly at $5.3 billion.
USDA’s farm income and government program outlay forecasts, which were
released in February 2008, were based on prices that persisted in late 2007.
43 “Some Blame Speculators for Worsening Global Food Crisis,” RB, Greenwire, April 24,
44 Nathanial Gronewold, “Commodity ‘Feedback Loop’ Fueling Price Surge,” Greenwire,
March 11, 2008, at [http://www.eenews.net/Greenwire/].
45 For more information, see CRS Report RS21970, The U.S. Farm Economy, by Randy
46 Ibid. Note, these farm income and government outlay projections were made in early
February 2008, and are likely to be revised — upward for farm income and downward for
government outlays — due to significant price rises since then. The next USDA farm
income update is scheduled for August 28, 2008.
47 For more information on commodity programs, see CRS Report RL33271, Farm
Commodity Programs: Direct Payments, Counter-Cyclical Payments, and Marketing Loans.
However, commodity prices have increased unexpectedly since then. In March,
FAPRI released more current estimates of government direct payments for 2008/2009
at $5.8 billion, down slightly from a revised forecast of $6.0 billion for 2007/2008.48
Under FAPRI’s projections, price contingent outlays on CCP and LDP are about $0.5
billion, while fixed direct payments of $5.2 billion comprise the majority of
government subsidy expenditures.
Crop Insurance Premiums Costs Surge in 2008
Commodity prices are a key ingredient in the formula for calculating crop
insurance premiums.49 Higher, more volatile prices lead to higher insurance
premiums, but they also provide the opportunity for producers to lock in unusually
high per-acre returns. Both volatility and absolute prices levels are substantially
higher in 2008 than in 2007 for all major program crops.
For example, the base price for corn was $4.06 per bushel in 2007 compared
with $5.25 in 2008 — an increase of $1.19 or 29%.50 The higher price level plus this
year’s higher volatility (Figure 12) translate into higher crop insurance premiums.
Premiums vary by crop and location, as well as the farm’s production history.
However, a higher base price also means that the per acre returns being insured are
substantially higher in 2008, especially since most crop insurance policies sold are
revenue products that allow farmers to insure a target level of revenue rather than just
yields.51 Many farmers on traditionally high-yielding farms in the Corn Belt will be
able to guarantee corn revenues in the $500 per acre range for a 75% coverage level.
Guarantees over $600 are possible with higher coverage levels. Similar high
insurance premiums and revenue guarantees will be available for most major
program crops in most major producing areas.
Unlike government commodity program outlays, which decline when prices
rise, government support for federal crop insurance rises with higher prices. This is
because the federal government subsidizes the premiums by an average of 50% to
60% of the total premium, depending on the coverage level. In addition, the
government reimburses the insurance companies for a share of their administrative
and operating expenses incurred in delivering the crop insurance policies. The
reimbursement share of administrative and operating expenses is based on a
percentage of total premiums; thus, it also rises with rising crop prices. FAPRI
projects net federal outlays (including premium subsidies, excess indemnity
48 “Selected Direct Government Payments,” U.S. Baseline Briefing Book, FAPRI-MU Report
#03-08, FAPRI, March 2008, p. 59.
49 Gary Schnitkey, “Crop Insurance Decisions: Why Not the Same as Last Year?” Illinois
AgriNews, Dept of Agriculture and Consumer Economics, University of Illinois, February
50 The base price for corn is equal to the average price during the first half of February, of
the harvest-time (i.e., December) futures contract at the Chicago Board of Trade.
51 For more information on crop insurance programs, see CRS Report RL34207, Crop
Insurance and Disaster Assistance: 2007 Farm Bill Issues, by Ralph Chite.
payments, and administrative and delivery costs) at $4.7 billion in 2008 and at $7.1
billion in 2009.52 These net outlays compare with an estimated $3.6 billion in 2007.
Sharply Higher Feed Costs
In February, ERS projected U.S. livestock feed costs for 2008 at a record $45
billion, up nearly $7 billion or over 18% from the previous year’s record.53
Meanwhile, USDA projects that wholesale prices for nearly all livestock product
categories (with the exception of poultry and eggs) will decline in 2008.54 Rising
feed costs (primarily grains and protein meals) have cut into profit margins of all
livestock sectors (beef, dairy, pork, and poultry) and, in the case of hogs have
rendered many operations unprofitable. For example, on April 28, 2008, Tyson Food
— a major producer, distributor, and marketer of chicken, beef, and pork products
— reported its first loss in six quarters and said that its corn and soybean costs would
increase by $600 million in 2008.55 Texas Governor Rick Perry — whose state is the
U.S. leader in beef production and ranks in the top 10 for production of poultry, eggs,
and dairy — has stated that rising corn prices have been particularly harmful to Texas
livestock producers. According to Governor Perry, every one-cent rise in corn prices
costs his state’s livestock sector over $6 million.56
The U.S. livestock sector will have to work through many issues related to the
changing nature of feed supplies as feedstock demand from biofuels production
lowers grain supplies and replaces them in part with higher protein supplies. Feed
supply logistics and feed ration composition are likely to remain unsettled for several
years if the biofuels industry continues to expand.
Futures Market Dilemma
Because of their transparency and their traditionally strong relationship with
cash markets, futures contract prices are often the primary basis for price
determination in many wholesale and cash markets, as well as for managing the risk
associated with the ownership (current or anticipated) of a large volume of an
agricultural commodity that is actively traded on a futures exchange. However, the
rapid, volatile escalation in agricultural futures prices that has evolved since 2005
appears to be diminishing the effectiveness of the futures market as a device for both
price discovery and risk management. The financial demands associated with routine
hedging operations (primarily in the form of increased margin requirements) have
52 “Crop Insurance,” U.S. Baseline Briefing Book, FAPRI-MU Report #03-08, FAPRI,
March 2008, p. 59.
53 “Farm Income and Costs: 2008 Farm Sector Income Forecast” briefing room, ERS, USDA
updated March 7, 2008; at [http://www.ers.usda.gov/Briefing/FarmIncome/].
54 World Agricultural Supply and Demand Estimates, World Agricultural Outlook Board,
USDA, May 9, 2008.
55 Steven Mueson, “A Costly Link Between Food and Fuel,” Washington Post, April 30,
56 Letter to EPA Administrator Stephen Johnson, by Texas Governor Perry, April 25, 2008,
risen in tandem with commodity prices, thereby placing severe strains on market
participants. In addition, increasing evidence of lack of convergence between cash
and futures contract prices for some commodities in some markets (observed
primarily for corn, soybeans, and wheat contracts at the CBOT) is increasing the risk
of futures-price-based forward contracts for the grain buyers that offer them.
These developments are of particular concern to traditional commercial interests
— such as grain and oilseed elevators, food processors, grain merchandisers, and
other participants in the marketing chain for agricultural products — who are likely
to see their costs of operations rise with any decline in the efficiency of the futures
market. Agricultural producers are equally concerned because, as grain and oilseed
buyers refrain from offering forward contracts, producers are increasingly unable to
take advantage of the current high prices. Forward contracting has traditionally been
one of the primary risk management strategies employed by U.S. producers.57 It is
not clear to what extent, if any, high commodity prices have had on the perceived
lack of convergence.
The Commodity Futures Trading Commission (CFTC), the government agency
responsible for oversight and regulation of U.S. futures exchanges, has said that an
examination of futures trading data has yet to show any visible evidence that hedging
operations are declining as a result of the rising financial obligations associated with
hedging.58 In addition, economists have studied the emerging lack of convergence
between cash and futures prices and have yet to identify any significant causal
factor.59 Despite any current lack of evidence, some agricultural interests affected by
these issues have accused the growing pool of speculative money that has been
invested in agricultural futures markets in recent years of artificially increasing prices
and their volatility, and sharply raising the costs of standard hedging operations. As
a result, these parties have called for greater federal regulation and monitoring over
speculative participation in futures markets, as well as for more stringent trading
limits on speculative funds. As a general rule, this type of speculative investment in
futures markets is considered to add necessary liquidity to commodity markets.
Several other issues related to the efficient functioning of futures markets that
have emerged in recent years — for example, electronic trading and the standard
practice of raising limits on the daily movement of contract prices when prices settle
at their limits — have been accused (rightly or wrongly) of aggravating the dilemma
surrounding the rising cost and declining viability of routine hedging operations in
agricultural futures markets. On April 22, 2008, the CFTC held a special public
57 For more information on farm risk management strategies, see “Risk Management
Strategies” at the ERS Farm Risk Management Briefing Room, at [http://www.ers.usda.gov/
Br iefing/RiskManagement/Strategies.htm] .
58 “Overview of Agricultural Futures Markets For Congressional Staff ,” by John Fenton,
Deputy Director for Market Surveillance, Div. of Market Oversight, CFTC, April 2, 2008.
59 For example, see “The Performance of Chicago Board of Trade Corn, Soybean, and
Wheat Futures Contracts After Recent Changes in Speculative Limits,” by Scott H. Irwin,
Philip Garcia, and Darrel L. Good, Dept. of Ag and Consumer Economics, Univ. of Illinois,
Urbana-Champaign, IL, May 2007, at [http://www.farmdoc.uiuc.edu/irwin/research/CBOT
“Round Table” to publicly discuss the issues confronting commodity futures
exchanges and to hear from market participants.60 While no policy positions were
recommended or adopted from the session, the Round Table represents an awareness
of the importance of the efficient functioning of agricultural futures markets to the
U.S. agricultural sector and a willingness to heighten monitoring by the CFTC of
these emerging issues.
Expanded, More Intensive Agricultural Production
Since most of the increase in demand is considered permanent, commodity
prices will likely return to lower levels only through an expansion in aggregate
supply (from either domestic or foreign sources) that outpaces demand growth. This,
in turn, may be accomplished by increases in either yields or cultivated area. The
strong market price signals received by the world’s farmers during the past six
months are expected to engender a response in both planted area and yield per unit
of planted area in 2008.
Agricultural Productivity. Yield increases generally accumulate slowly over
time via more intensive use of fertilizers, pesticides, improved seeds, and adoption
of better farming practices (which themselves are generally the product of
investments in research, extension, and infrastructure). The availability and cost of
fertilizers and chemicals can be a limiting factor on short-term yield gains.
Furthermore, adoption of more intensive cultivation practices may contribute to
potentially harmful environmental consequences such as possible water quality
degradation from fertilizer and chemical runoff, and increased soil erosion.
Expanded Cropped Area. Area increases for a given crop can occur more
quickly than yield increases by shifting land use among different crops, by altering
rotational tillage-fallow cultivation practices, or by bringing marginal, less-
productive soils into cultivation. Land-use shifts imply winners and losers among
crops, while altering rotational patterns and farming marginal lands all imply
potentially harmful environmental consequences such as reduced wildlife habitat,
lower soil fertility, increased erosion, possible water quality degradation from
nutrient and sediment loads in rural waterways, and lost carbon sequestration. Most
analysts agree that the current high commodity prices are likely to entice some61
marginal land back into production in 2008.
In 2007, about 321 million acres were planted to the principal crops in the
United States, of which 315 million acres were for the major program crops.62 In
addition, 62 million acres of hay were harvested in 2007. In 2008, USDA estimates
60 For more information, visit the CFTC website at [http://www.cftc.gov].
61 “Crops Winning out over Conservation for Some Landowners,” James MacPherson,
Associated Press, WashingtonPost.com, April 30, 2008.
62 Acreage, National Agricultural Statistics Service (NASS), USDA, June 29, 2007. Major
program crops include corn, sorghum, oats, barley, winter wheat, rye, durum wheat, other
spring wheat, rice, soybeans, peanuts, sunflower, cotton, dry edible beans, potatoes,
sugarbeets, canola, proso millet, hay, tobacco, and sugarcane.
that about 4 million additional acres will be planted to principal crops (up 1.2%),
while program crop area will expand by 6.2 million acres (up 2%).63 Thus, more than
a 2-million-acre shift from minor crops to program crops is anticipated. In addition,
nearly 1 million acres is expected to shift from hay to program crop area.
Converting Conservation Acres to Production
In the United States, the Conservation Reserve Program (CRP) represents the
most visible bank of potential crop land available for re-entry into agricultural
production.64 The CRP provides payments to farmers to take highly erodible or
environmentally sensitive cropland out of production for ten years or more to
conserve soil and water resources. In February 2008, national enrollment in the CRP
was 34.6 million acres. Each year, a portion of enrolled CRP acres is eligible for
renewal or removal depending on the owner’s preferences which, in turn, are likely
influenced by market conditions. Farmers also have the option of paying a penalty
for early withdrawal, but the penalty (which includes full repayment of all benefits
received) is generally prohibitive except in the case of recently enrolled land which
has yet to accumulate many benefits. In March 2007, then-Secretary of Agriculture
Mike Johanns announced that there would be no penalty-free release of acreage from
the CRP in 2007. USDA estimates that, in 2007, about 130,000 acres of CRP that
were under contract were withdrawn early and were subject to penalty. Secretary
Schafer has reiterated the no-penalty-free-release-of-CRP position for FY2008, but
has said that USDA will make a decision concerning FY2009 in August or
September 2008. However, as a partial compromise response to high feed prices,
USDA announced on May 27, 2008, that more than 24 million acres of land enrolled
in CRP will be eligible for use in 2008 as hay or forage after the primary nesting
season ends for grass-nesting birds.65
CRP is perceived as providing multiple environmental services — for example,
critical wildlife habitat, wind and soil erosion control, wetlands protection, forestry
restoration, carbon sequestration, and water quality gains via filter strips and buffer
acreage. As a result, the public interest in seeing lower crop prices via expanded
cropland must be weighed against the public interest in maintaining the substantial
environmental benefits of land in CRP.66
Between September 2007 and February 2008, 2.1 million acres opted out of the
CRP as their contracts expired. Another 27.8 million acres under CRP contracts will
expire by 2010. Contracts for approximately 23 million (83%) of these acres have
been renewed or extended. High commodity prices, however, may discourage future
re-enrollments and contract extensions. Environmental and wildlife organizations
63 Prospective Plantings, NASS, USDA, March 30, 2008.
64 For more information on the CRP, see CRS Report RS21613, Conservation Reserve
Program: Status and Current Issues, by Tadlock Cowan.
65 “USDA Announces CRP Permitted Use for Livestock Feed Needs,” USDA Press Release
No. 0137.08, May 27, 3008.
66 “Options for the Conservation Reserve Program,” by Bruce A. Babcock and Chad Hart,
Iowa Ag Review, Spring 2008, Vol. 14, No. 2, pp. 6-7.
are major advocates for maintenance and/or expansion of current CRP levels.
Livestock groups, the milling and baking industry, and other food processors favor
reducing or eliminating early-out penalties for CRP to maximize the amount of land
that is cropped.67 The Alliance for Agriculture Growth and Competitiveness
(AAGC) — a group representing the beef, poultry, pork, and grain and feed
industries — has been lobbying USDA since 2005 to allow landowners to pull out
of CRP contracts without penalty.68 According to the Center for Agricultural
Research and Development (CARD), if CRP policy is unchanged, than as much as
2 million acres of CRP land per year will be brought back into crop production over
the next 10 years.
CRP Policy Options. USDA’s March Prospective Plantings report estimates
about a 2% increase in program crop planted acreage in 2008 in response to the high
commodity prices. Given that USDA’s projected year-to-year farm price increases
for 2007/2008 range from 20% to 60% for the major program crops, economists at
CARD suggest that such a low area response, if realized, implies that U.S. farmers’
ability to respond to high commodity prices is constrained by a lack of viable
cropland.69 As a result of this land constraint, CARD suggest that USDA consider
“re-optimizing” CRP through a combination of penalty elimination and aggressive
rebidding of its entire CRP holdings. By eliminating penalties on CRP contracts that
expire in the next three years, more productive land could return to production
earlier, while the freed up CRP payment funds could be used to offer further
protection to the more environmentally sensitive land that offers the greatest
environmental benefits. Similarly, CARD suggests that USDA, by rebidding its
entire CRP land portfolio, could ensure that the most vulnerable land is retained
while allowing less vulnerable land to return to production.
Rising Food Price Inflation Impacts Consumer Budgets
The rise in agricultural prices, combined with high energy costs, have
contributed to higher food inflation in the United States and around the world. In
general, higher food price inflation impacts consumers’ dietary choices as relative
prices vary across foods that compete for food expenditure dollars.70 The overall
impact to consumers from higher food prices depends on the proportion of income
that is spent on food: households that spend a much greater proportion of their
income on food have less flexibility to adjust expenditures in other budget areas to
accommodate increasing food costs.
68 For example, see the AAGC mission statement and its letter of policy recommendations
for USDA at [http://www.cmcmarkets.org/files/18_mission_&_prin.pdf] and [http://www.
nopa.org/ content/newsroom/2005/au g/ 081205_lettertochuckc onnor_CRP.pdf].
69 “Options for the Conservation Reserve Program,” by Bruce A. Babcock and Chad Hart,
Iowa Ag Review, Spring 2008, Vol. 14, No. 2, pp. 6-7.
70 Changing Structure of Global Food Consumption and Trade, Anita Regmi, Editor, WRS-
International comparisons of household budgetary expenditures indicate that
rich industrial nations spend 6% to 20% of their annual budgets on food compared
with 20% to 30% for middle income countries, and 30% to nearly 80% for low
income countries.71 These differences suggests that food price increases represent a
potentially far more serious hardship for households in low income countries,
particularly those nations that depend on imports for an increasing share of their
domestic food needs.
U.S. Food Price Inflation. In the United States, food prices increased by
price inflation for 2008 will be in the range of 4.5% to 5.5%. During the first four
months of 2008, the U.S. Bureau of Labor Statistics (BLS) reports that food prices
climbed by 2.25% for an annual rate of 6.75%.73 Figure 15 displays the monthly rate
of change in the BLS food price index compared with its more stable 11-month
moving average. Since 2005, the general trend has been upward and in June 2007,
the 11-month moving average reached its highest point (0.43%) since June 1990.
Figure 15. Food Price Index: Month-to-Month Change
vs. 11-Month Moving Average (11-mo MA)
Monthly Rate of Change
199 0 199 3 199 6 199 9 200 2 200 5 200 8
Source: CRS calculations based on data from the U.S. Dept. OfLabor, Bureau of Labor Statistics.
71 “Table 97 — Expenditures on Food, by Selected Countries, 2002,” Briefing Room: Food
CPI, Prices and Expenditures, ERS, USDA, at [http://www.ers.usda.gov/Briefing/
72 “CPI for Food Forecasts,” Briefing Room: Food CPI, Prices, and Expenditures, ERS,
USDA, May 19, 2008. See also CRS Report RS22859, Food Price Inflation: What are the
Issues?, by Tom Capehart and Joe Richardson.
73 “Table 1. Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, by
expenditure category and commodity and service group,” U.S. Dept. of Labor, BLS; as
observed on April 22, 2008.
Despite the sharp increases in commodity prices in 2007, most economists agree
that energy costs, particularly fuel prices, have played a larger role in food price
inflation than have commodity prices.74 In general, retail food prices are much less
volatile than farm-level prices and tend to rise by a fraction of the change in farm
prices. This is because the actual farm product represents only a small share of the
eventual retail price (20% on average), whereas transportation, processing,
packaging, advertising, handling, and other costs — all vulnerable to higher fuel
prices — comprise the majority of the final sales price.75
Because food expenditures represent a relatively small share of consumer
spending for most U.S. households, food price increases are absorbed relatively
easily in the short run. On average, in 2006 U.S. households spend about 6% of their
total disposable personal income on food consumed at home and another 4% on food
consumed away from home for a total food outlay of about 10.5%. 76 However, even
in a wealthy nation such as the United States, household income variations suggest
that the impact of food price inflation can vary widely and can result in painful
spending choices at the household level. In 2006, U.S. families with less than
$20,000 in income spent over 20% of their after-tax income on food.77
The United States has several food assistance programs that are designed to
assist households in meeting their minimum food needs.78 The two largest programs,
Food Stamps and child nutrition programs, operate as entitlement programs that
make specified payments to all qualifying beneficiaries. However, in the case of
Food Stamps the burden is upon the eligible individuals to seek out the benefits. In
general, rising food prices result in higher federal spending on Food Stamps and child
nutrition programs because participation expands and because the benefits under
most federal food assistance programs are indexed to some type of consumer food
basket that would also rise with higher prices. In 2007, $33.2 billion was spent on
the Food Stamp program while the average food stamp recipient received $95.63 per
month in benefits and the average participating household received $214.69 per
International Price Rises Dim Food Security Prospects. Due to
market and trade linkages, high commodity prices ripple through international
markets where impacts vary widely based on a country’s grain import dependence
and its financial ability to respond to higher commodity prices. For example, both
74 For example, see “The Relative Impact of Corn and Energy Prices in the Grocery Aisle,”
John M. Urbanchuk, Director, LECG LLC, June 14, 2007.
75 “Price Spreads from Farm to Consumer,” Briefing Room: Food Marketing System in the
U.S., ERS, USDA, at [http://www.ers.usda.gov/Data/FarmToConsumer/marketingbill.htm].
76 Statement by Joseph Glauber, Chief Economist of USDA, at a Hearing entitled “How Are
High Food Prices Impacting American Families?” before the Joint Economic Committee
U.S. Congress, May 1, 2008, p.15, at [http://www.jec.senate.gov/].
78 For more information on U.S. food assistance programs, see “Federal Spending for
Domestic Assistance Programs,” in CRS Report RS22859, Food Price Inflation: What are
the Issues?, by Tom Capehart and Joe Richardson.
Japan and Mauritania are dependent on imports for a substantial portion of domestic
food needs; however, Japan has the financial means to better accommodate rising
food import prices.
Import-dependent developing country markets are put at greater food security
risk due to the higher cost of imported commodities. Lower-income households in
many foreign markets where food imports are an important share of national
consumption, and where food expenses represent a larger portion of the household
budget, may be affected quite severely by higher food prices.79 Humanitarian groups
have expressed concern for the potential difficulties that higher grain prices imply for
developing countries that are net food importers.80 According to the U.N.’s Food and
Agricultural Organization (FAO), the grain import bill for Low-Income Food-Deficit
Countries (LIFDCs) — those nations identified as the most vulnerable to
international food price changes — is forecast to reach $169 billion in 2008, 40%
more than in 2007 due to the sharp rise in international cereal prices, freight rates,
and oil prices.81
In general, the cost of food imports has been compounded by bulk ocean freight
rates which were record high in 2007.82 Ocean freight rates are expected to retreat
slightly in 2008 as the supply of ships expands, however, the continual rise of crude
oil prices to new highs in early 2008 suggest that shipping costs are unlikely to
experience a significant decline, and could possibly rise with higher fuel costs.
The political consequences of food shortages can be severe. Since January
2008, the emerging food crisis has sparked reports of hoarding and theft.83 Civil
unrest over food prices have been reported around the globe including Egypt,
Indonesia, the Philippines, and much of Africa (Burkina Faso, Cameroon, Ivory
Coast, Mauritania, Mozambique, Senegal, and South Africa).84 In Haiti, two days of
food-price rioting toppled the prime minister.85
79 Shahla Shapouri and Stacey Rosen, “Energy Price Implications for Food Security in
Developing Countries,” Food Security Assessment, 2006, GFA-18, ERS, USDA.
80 International Monetary Fund, World Economic Outlook: Globalization and Inequality.
October 2007. Washington.
81 “Food Prices Remain High Despite Higher Output, Increased Hunger Likely in Some Poor
Countries,” FAO Newsroom, FAO, U.N., May 22, 2008. For detailed information on
international food supply and demand projections see Crop Prospects and Food Situation,
No. 2, April 2008, FAO, U.N., at [http://www.fao.org/worldfoodsituation].
82 Grain Transportation Report, Agricultural Marketing Service, USDA, April 10, 2008 and
May 8, 2008.
83 For an example, see “Rice Dealers Hoard Lucrative Crop, Intensifying Shortage,” by RB,
Greenwire, April 18, 2008.
84 “Food Price Anger Sparks Protests,” Reuters News, April 21, 2008.
85 “U.N. Food Agency Facing Worst Crisis, Director Says,” Nathanial Gronewold, E&E
News PM, April 22, 2008, at [http://www.eenews.net].
High Prices Hurt International Food Aid Prospects
Higher commodity and food prices reduce the international community’s ability
to provide food aid to other countries without additional appropriations. This is
because most international food aid activities (the United States included) are fixed
in value by annual appropriations; thus, the amount of commodities that can be
purchased declines with rising food prices.86
In 2007, the U.N.’s World Food Program (WFP) — the world’s leading source
for international food aid — estimated it would need $2.9 billion to cover its 2008
approved project needs which included feeding 73 million people in 78 countries.
However, the WFP has twice been forced to revise its operating needs assessment
based on continually rising prices — first on March 20, when it made an emergency
appeal for an additional US$500 million, then, barely a month later on April 22,
2008, when the additional funding need was raised to $755 million.87 One of the
difficulties facing the WFP is that rice suppliers that had signed earlier grain delivery
contracts with the U.N. when prices were lower were finding it more profitable to pay
a 5% penalty to break the contract, and then sell their rice at the current higher
International food aid is the United States’ major response to reducing global
hunger.89 In 2006, the United States provided $2.1 billion of such assistance, which
paid for the delivery and distribution of more than 3 million tons of U.S. agricultural
commodities. The United States provided food aid to 65 countries in 2006, more
than half of them in sub-Saharan Africa. The U.S. Agency for International
Development (USAID) indicated that rising food and fuel prices would result in a
significant reduction in emergency food aid in 2008. According to press reports in
March 2008, USAID expects a $200 million shortfall in funding to meet emergency
food aid needs. For FY2008, Congress appropriated $1.2 billion for P.L. 480 food
aid, the same as FY2007.90 For FY2009, the President’s budget again requested $1.2
billion. However, in six out of ten years since 1999, supplemental funding for P.L.
Since February, President Bush has been under increasing pressure from
international hunger advocacy groups, as well as the U.S. milling and baking industry
and other food industry groups, to open grain supplies held in the Bill Emerson
Humanitarian Trust (BEHT) — which was estimated to hold $177 million in cash
and about 33 million bushels of wheat in early 2008 — as a short-term means of
86 For more information on the international food crisis, see CRS Report RL34478, Rising
Food Prices and Global Food Needs: The U.S. Response, by Charles Hanrahan.
87 “Food Crisis Is Depicted As ‘Silent Tsunami’,” by Kevin Sullivan, Washington Post,
April 23, 2008.
88 “Food Prices Hampering U.N. Agency’s Ability to Head Off ‘New Face of Hunger’,”
Nathanial Gronewold, E&E News PM, April 24, 2008, at [http://www.eenews.net].
89 For more information, see CRS Report RL33553, Agricultural Export and Food Aid
Programs, by Charles Hanrahan.
90 P.L. 480 is the principal U.S. food aid program. It is administered by USAID.
dampening grain prices while augmenting international supplies. On April 14, 2008,
President Bush directed the Secretary of Agriculture to access grain supplies from the
BEHT valued at $200 million to meet emergency food aid needs abroad.91
Farm Commodity Market Outlook
Positive Short-Run Outlook, Especially for Food Crops
For some crops, the price increases are likely to be relatively short-term in
nature. Substantial recovery is expected to occur by late 2008, especially in wheat
and rice markets, as global supplies rebuild and exporters relax their export controls.
FAO forecasts that world cereal production will expand 3.8% to a record 2.192
billion tons in 2008.92 Most of the increase is expected to come from wheat with rice
and coarse grains showing modest gains. If realized, FAO predicts that the expanded
production will help to ease the current tight global cereal supply situation.
However, any recovery remains weather-dependent and commodity prices are likely
to remain highly volatile until the 2008 harvests are “in the bin.”
More immediate price moderation can be achieved if government policies to
limit or ban exports of available grain and oilseed supplies are repealed. Such
export-prohibiting policies distort international market prices in the short-run by
limiting access to export supplies, while dampening long-run productivity gains by
artificially curtailing demand and thereby discouraging investments in domestic
agriculture. In the international wheat market, Ukraine has already reversed its wheat
export ban, and some market analysts expect Russia and Kazakhstan to remove their
export bans by September if good crop conditions persist.
Circumstances are also rapidly changing in the international rice market.
Initially fears of shortage were compounded when Cyclone Nargis ravaged large
swaths of Burma’s secondary rice-growing regions.93 Considerable uncertainty
remains surrounding Burma’s rice situation. However, on May 19, 2008, Japan (with
the apparent endorsement of the United States) announced that it planned to export
91 White House News Release, Office of the Press Secretary, April 14, 2008. For more
information on the Bill Emerson Humanitarian Trust, see CRS Report RS21234, The Bill
Emerson Humanitarian Trust: Background and Current Issues, by Charles Hanrahan.
92 “Food Prices Remain High Despite Higher Output, Increased Hunger Likely in Some Poor
Countries,” FAO Newsroom, FAO, U.N., May 22, 2008. For detailed information on
international food supply and demand projections see Crop Prospects and Food Situation,
No. 2, April 2008, FAO, U.N., at [http://www.fao.org/worldfoodsituation].
93 “Burma, Cyclone Could Further Cut Back Rice Supply, FAO,” Clarisse Douaud,
[http://www.foodnavigator-usa.com], May 12, 2008.
94 “Kudos to Tokyo and Washington on Rice Sales — Et Tu, Thailand and India?” Peter
Timmer, Global Development: Views From the Center, Center for Global Development,
from the Center for Global Development (CGD), Japan continues to hold nearly 1.5
million tons of rice that would otherwise be excluded from international markets by
a WTO market-access trade commitment. In addition, the CGD reports that China
and Thailand also have substantial exportable rice stocks (1.5 million and 2.0 million
tons, respectively) that have been held off of international markets due to
uncertainties surrounding domestic price inflation and food needs. On May 26, 2008,
Cambodia’s prime minister, Hun Sen, announced that his country was lifting its ban
on rice exports and that Cambodia had over 1 million tons or rice available for
export.95 India is expected to wait for the arrival of the annual monsoon rains —
India’s monsoon is usually due in mid-June and is vital for non-irrigated rice
production — before deciding on whether to ease its trade restrictions. Easing of rice
export bans in combination with projections for record production are expected to
substantially dampen international rice market prices in the latter half of 2008.
Biofuel feedstock demand has bid up the price of corn, soybeans, and other
crops that compete for acres, especially in the United States. Both USDA’s and
FAPRI’s outlook projections for 2008 include expanded acreage in the United States
and worldwide, as high prices bring marginal land back into crop production. In the
United States, expectations for increased double cropping of winter wheat and
soybeans in the Delta and Southeast, along with a nation-wide return to crop
production of a substantial portion of pasture land as well as nearly 2 million acres
of former CRP, are expected to boost planted area for corn, soybeans, and wheat by
nearly 7 million acres to 224.6 million acres.
Similar area expansion is expected to occur worldwide in response to strong
price incentives and, in some countries, to government policy. For example,
StatsCanada recently forecast Canadian wheat plantings to be up over 16% in 2008.96
In the EU, in September 2007 agriculture ministers suspended a 10% set-aside
requirement that paid farmers to idle nearly 3.8 million hectares (9.4 million acres)
of cropland annually. Mariann Fischer Boel, EU Agriculture Commissioner, expects
the additional land re-entering crop production to bolster EU grain output by up to
Despite projections for record world grain production in 2008, only marginal
global stock building is projected to occur. Relatively low stocks are expected to
persist through 2008 as global production will be hard pressed to keep up with
continued growth in demand (even with a return to normal weather and yields). This
will leave commodity markets particularly vulnerable to news of poor harvests or
demand shocks, and will very likely mean continued high price volatility.
May 19, 2008.
95 “Rice Market Eases as Cambodia Lifts Ban on Exports,” Javier Blas, Financial Times
Online, May 27, 2008; [http://www.ft.com].
96 “Field and Specialty Crops: Seeded Area,” Statistics Canada, April 21, 2008.
97 “Set Aside Suspended by European Union,” by Bruno Waterfield and Charles Clover,
©Telegraph Media Group Limited 2008, September 26, 2007; [http://www.telegraph.co.uk].
Long-Term Outlook Hinges on Productivity Gains
Projections for a steady rise in global population, accompanied by sustained
income growth in the world’s developing economies, are expected to sustain growth
in demand for livestock products and the feedstuffs — e.g., coarse grains and protein
meals — needed to produce those products. In addition, the outlook for increased
demand for agricultural feedstocks to meet large increases in government biofuel-
usage policies, particularly in the United States and the European Union (EU),
suggest that demand will increase strongly over the coming decade for corn (the
primary feedstock for U.S. ethanol production), and vegetable oils (the primary
feedstock for biodiesel production in the United States and the EU).
As a result, even with a return to normal crop growing conditions and successful
harvests, prices for feed grains and oilseeds — as well as those crops that compete
for area with feed grains and oilseeds — are expected to remain at significantly
higher levels than experienced during the 1998-2006 period. For an indication of
how much higher farm prices might be in the future, see Table 2 where FAPRI’s 10-
year projections suggest that prices for major U.S. program crops and products —
corn, barley, sorghum, soybeans, soybean oil, soybean meal, wheat, and rice — will
remain well above the average prices of the recent five-year period 2002/2003 to
A sustained period of agricultural output growth that surpasses the projected rise
in demand is needed to produce a return to abundant supplies and more moderate
prices. Increased agricultural production implies some combination of increased land
dedicated to crop production and/or increased output per acre of planted land. For
most countries, only marginal expansion of cropped area is possible and often this
involves less-productive, more environmentally sensitive land. Agricultural
productivity gains, on the other hand, require sustained long-term investment in
agricultural research, extension, and marketing infrastructure. How commodity
markets actually evolve will depend greatly on the policy choices that the U.S. and
international community make concerning agricultural productivity and renewable
U.S. and International Policy Response
Because the current U.S. and global commodity market dynamic affects so many
aspects of agricultural markets including short-term consumer needs, as well as
issues related to intermediate and longer-term agricultural productivity, the nature of
the U.S. and international response will necessarily vary by targeted beneficiary as
well as the relevant time period. It is unlikely that any single policy response will be
able to address all issues simultaneously. This section briefly reviews some of the
more salient policy responses being suggested or implemented by major players in
the U.S. and international agricultural arena.
U.S. Industry Groups Decry Rising Costs of Grain as an Input
Interests from livestock and poultry sectors, food processors and retailers, and
hunger advocacy groups, have advocated for changes in current U.S. agricultural and
food policy. Many interests from within these sectors have advocated for the reversal
of U.S. biofuels policy, while some have also advocated for a reduction in crop land
retirement under the CRP program.
The U.S. milling and baking industry, led by the American Bakers Association
(ABA), held a march in Washington, D.C. in March, 2008, to highlight their
concerns about the short grain supplies and sharp price rises in U.S. commodity
markets. As part of their campaign, the ABA put forward a three-point congressional
!First, the ABA claims that as much as one-third of CRP land could
be returned to agricultural production without environmental harm.
They urge Congress to accept House Agriculture Committee
Chairman, Colin Peterson’s proposal to decrease the CRP by 7
million acres; they encourage Congress and the USDA to support
early out-of-contract provisions within the CRP; and they request
that USDA and the Administration undertake an evaluation to
identify viable cropland within the CRP to facilitate its return to
!Second, the ABA recommends that EPA use its waiver authority to
waive the RFS annual requirements, and to drop all tariffs on
!Third, the ABA recommends that Congress and USDA consider the
needs of the domestic food industry ahead of export markets
whenever U.S. wheat stocks drop below a three-month-usage supply.
In April 2008, a spokesperson for the U.S. Grocery Manufacturers Association
called on Congress, the EPA, and states to freeze and rollback the biofuels mandates
due to their effect on food prices.100 In addition to interests from the food processing
and grocery retail sectors, the U.S. livestock sector has expressed long-standing
concerns about diverting feed crops away from commercial animal feeders and into
biofuels production. The National Cattlemen’s Beef Association (NCBA) explicitly
opposes the national biofuels RFS.101 NCBA members have called for a
market-based approach for the production and usage of ethanol produced from
livestock feedstuffs, and the NCBA supports sun-setting the existing biofuels tax
98 For more information see the American Bakers Association, Press Releases, at
[ h t t p : / / www.a me r i c a nba ke r s .or g/ ] .
99 For more information, see CRS Report RS22870, Waiver Authority Under the Renewable
Fuel Standard (RFS), by Brent Yacobucci.
100 Transcript from interview with Scott Faber, vice president of government affairs, Grocery
Manufacturer Association, E&ENews OnPoint, April 9, 2008, at [http://www.eenews.net/].
101 “Renewable Fuels and Ethanol Production,” policy news, NCBA, at [http://www.beef
usa.org/ gove RenewableFuelsandEthanolProduction.aspx].
credits and the ethanol import tariff as scheduled and not allowing for renewal in
their current form. In April, a major international agriculture research group, the
International Food Policy Research Institute (IFPRI), announced that a moratorium
on global grain- and oilseed-based biofuels would help ease corn prices by up to 20%
and wheat prices by 10% in the next few years.102
On April 25, 2008, Texas Governor Rick Perry, in a letter to Stephen Johnson,
Administrator of the Environmental Protection Agency (EPA) — the federal agency
responsible for administering the RFS — to request that EPA waive 50% of the RFS’
ethanol requirements to alleviate their impact on corn prices.103 Section 211(o) of the
Federal Clean Air Act (as amended by EISA of 2007) provides the EPA
Administrator, in consultation with the Secretary of Agriculture and the Secretary of
Energy, with the authority to suspend for one year all or part of the RFS. EPA has
90 days to respond to Governor Perry’s petition for a waiver. The National Chicken
Council’s President, George Watts, publicly commended Governor Perry’s action
stating that ethanol has been a factor behind rising food costs.104
On May 2, 2008, 23 Republican senators sent a letter to EPA administrator
Johnson to inquire about the status of regulations for states applying for an ethanol
mandate waiver and urged that EPA take into consideration food inflation concerns
related to the biofuels mandate.105 However, not all quarters agree with the blame
being targeted on the biofuels sector. The Renewable Fuels Association, the National
Corn Growers Association, and other interest groups that have benefitted from U.S.
biofuels policy suggest that high oil prices, global production shortfalls, and foreign
export controls are the main culprits and that it is unfair and incorrect to place the
entire blame on the biofuels sector.106
U.S. Congressional Action
Hearings. Since May 1, 2008, Congress has held a series of hearings on issues
related to the potential causes and effects of the run-up on agricultural prices.
Witness lists and testimony are available for each of these at the respective
committee’s website. These include the following:
102 “Biofuels Halt Would Ease Food Prices — Ag Group,” Missy Ryan, Guardian, April 29,
103 “Letter to EPA Administrator Stephen Johnson,” by Texas Governor Perry, April 25,
104 “National Chicken Council Commends Texas Governor for Filing First Request for
Waiver of National Renewable Fuel Standard,” NCC Press Release, April 25, 2008.
105 “Sens. Hutchinson, McCain Urge Ethanol Mandate Relief from EPA,” news release, Sen.
Hutchinson’s office, May 2, 2008, at [http://hutchinson.senate.gov/pr050208b.thml].
106 For example, see the articles “Flat out Wrong About Food Prices,” and “RFA Opposes
Waiver Request by Texas Governor,” at the RFA website at [http://www.ethanolrfa.org/];
or “Recipe for a Food and Fuel Smear Campaign,” Rick Tolman, Chief Executive Officer,
National Corn Growers Association, at [http://www.ncga.com/].
!May 1, 2008; Joint Economic Committee; Hearing: “How Are High
Food Prices Impacting American Families?”;
!May 6, 2008: House Committee on Energy and Commerce;
Subcommittee on Energy and Air Quality; Hearing: “The Renewable
Fuels Standard: Issues, Implementation, and Opportunities”;
!May 7, 2008; Senate Homeland Security and Government Affairs;
Hearing: “Fuel Subsidies: Is There an Impact on Food Supply and
!May 14, 2008; House Committee on Financial Services; Hearing:
“Contributing Factors and International Responses to the Global
!May 14, 2008; Senate Committee on Foreign Relations; Hearing:
“Responding to the Global Food Crisis”;
!May 15, 2008; House Committee on Small Business; Hearing:
“Food Prices and Small Businesses”; and
!May 20, 2008; Senate Homeland Security and Government Affairs;
Hearing: “Financial Speculation in Commodity Markets: Are
Institutional Investors and Hedge Funds Contributing to Food and
Energy Price Inflation?”
Legislation. Several bills have been introduced in direct response to the high
commodity prices and the alleged causes. On April 29, 2008, Congressman Jeff
Flake introduced a bill, H.R. 5911, that would repeal the RFS biofuels usage
mandate, as well as the biofuels tax credit incentive and the ethanol import tariff —
all to take effect immediately upon enactment of the bill. On May 19, 2008, Senator
Kay Bailey Hutchinson introduced S. 3031, a bill that would freeze the RFS at its
2009 level of 9 billion gallons rather than allowing it to increase to 36 billion gallons
Additional legislative proposals currently being negotiated in Congress that
could contribute directly or indirectly to the U.S. response to the current global food
crisis are possible new emergency supplemental appropriations bills. Congress is
presently considering supplemental appropriations FY2008 and FY2009 for the Iraq
war which could include some as-yet-undetermined funding for emergency response108
to the international food crisis. President Bush has requested substantial new
money for additional food aid as part of these emergency supplemental bills.
In addition to pending legislative proposals, on May 22, 2008, new farm109
legislation (P.L. 110-234) was enacted. Farm legislation has important
implications for the level and timing of funding for several areas related to the U.S.’s
107 “Citing Food Costs, Texas Governor Seeks Waiver of Fuel Mandate,” Ben Geman,
Greenwire, April 28, 2008, [http://www.eenews.net].
108 For more information see CRS Report RL34451, Second FY2008 Supplemental
Appropriations for Military Operations, International Affairs, and Other Purposes.
109 For more information see CRS Report RL33934, Farm Bill Legislative Action in the 110th
Congress, Renee Johnson coordinator.
ability to respond to domestic and international food concerns.110 For example, these
include provisions related to U.S. domestic nutrition programs, U.S. foreign food aid
and agricultural assistance, the on-going debate over food versus fuel, agricultural
land use incentives, and agricultural productivity issues.
Immediate International Food Crises Response
Note, this and the next section briefly summarize some of the more salient
events related to the international communities attempts at responding to the
perceived food crisis. For more detail, see CRS Report RL34478, Rising Food
Prices and Global Food Needs: The U.S. Response, by Charles E. Hanrahan.
On April 29, 2008, U.N. Secretary-General Ban Ki-moon announced that he will
lead a task force to coordinate the efforts of the U.N. system in addressing the global
crisis arising from the surge in food prices. The Task Force on the Global Food
Crisis will bring together the heads of U.N. agencies, funds and programs, and the
World Bank and International Monetary Fund, as well as experts within the UN and
leading authorities from the international community.
The two principal agencies within the United Nations (U.N.) responsible for
international agricultural development and food aid are the Food and Agricultural
Organization (FAO) and the World Food Program (WFP). WFP is the U.N.’s front-
line agency in the fight against global hunger via emergency operations in response
to natural and man-made disasters, relief and rehabilitation projects, development
projects where food aid is used for social and economic development, and special
operations involving logistics to speed up the movement of food aid.111 In contrast,
FAO has a longer-term focus. FAO is mandated to raise levels of nutrition, improve
agricultural productivity, better the lives of rural populations and contribute to the
growth of the world economy. FAO accomplishes this through in-country
agricultural research and extension support, information dissemination, international
workshops and conferences, etc. in order to help developing countries modernize and
improve their agriculture, forestry and fisheries practices and ensure good nutrition
On December 17, 2007, the U.N.’s FAO launched its Initiative on Soaring Food
Prices (ISFP) as a focal point for technical and policy assistance to those countries
identified as the hardest hit by the sharp increase in food prices — referred to as
Low-Income Food-Deficit Countries (LIFDCs).113 The international community is
110 For more information on the U.S. response to international food concerns, see CRS
Report RL34478, Rising Food Prices and Global Food Needs: The U.S. Response by
Charles E. Hanrahan. For information on U.S. domestic food issues see CRS Reportth
RL33829, Domestic Food Assistance: The 2007 Farm Bill and Other Legislation in the 110
Congress, by Joe Richardson.
111 For more information on the WFP, see [http://www.wfp.org/].
112 For more information on the FAO, see [http://www.fao.org/].
113 “Information Note,” FAO’s Initiative on Soaring Food Prices, FAO, U.N., at
seeking to coordinate on-going work by the World Bank, the International Fund for
Agriculture Development (IFAD), WFP, Regional Development Banks (e.g., the
Asian Development Bank and the African Development Bank), and private
foundations to integrate new projects and interventions. First, the WFP, FAO, and
IFAD are scheduled to present their strategies for coping with the food-price crisis
at a U.N. executive board meeting in Geneva.114 Then, the WFP and other
international agencies will hear directly from governments on what they believe
policy responses need to be at a gathering at U.N. headquarters in New York. These
policy meetings are a prelude to the FAO’s “Summit on Food Security” in Rome
scheduled for June 3-5, 2008. It is expected that the Rome summit will provide a
forum for coordinating the global response to the current food crises. The list of
current proposals by the U.N. and its agencies includes:115
!Establishment of a U.N. task force on food crisis.
!WFP request for $755 million of emergency food aid (above normal
program funds) to world’s poorest.
!Emergency $1.7 billion initiative to provide poor food importers
with seed and fertilizer.
!The World Bank is to explore a rapid financing facility for poor
!The International Monetary Fund (IMF) proposes aid to countries
facing balance of payments gaps.
!The U.N. calls for the lifting of food export restrictions.
Long-Term Agricultural Productivity Response
While the international donor community is responding to short-term food
needs, other interest groups are encouraging both greater investment in international
agricultural productivity and the phasing out or elimination of government policies
that distort market signals and diminish agricultural producer’s incentives to respond
to price signals. For each country, the appropriate policy response depends on the
specific policy goal.116 Many suggestions are being offered by market watchers, but
several recurring themes are present:
!Reverse protective country-level policies of export bans and/or
limitations that have exacerbated the problem.
!Reduce or eliminate subsidies that divert agricultural land from food
and feed production to the production of feedstocks for biofuels.
[ h t t p : / / www.f a o.or g/ newsr oom/ c ommon/ ecg/ 1000826/ en/ ISFP.pdf ] .
114 “Food Prices Hampering U.N. Agency’s Ability to Head Off ‘New Face of Hunger’,”
Nathanial Gronewold, E&E News PM, April 24, 2008, at [http://www.eenews.net].
115 “U.N. Taskforce to Tackle Global Food Crisis,” Harvey Morris, Financial Times, April
116 For example, see “Food Price Hikes Threaten Political Crises,” by John Baize, World
Perspectives, Inc., April 9, 2008.
!Remove or phase out domestic policies that keep market prices low
in favor of consumers, but at the expense of sustained investment in
the agricultural sector.
!Remove barriers that have constrained the production and use of
In April, the International Food Policy Research Institute (IFPRI) — a major
international agriculture research agency that operates as part of the Consultative
Group on International Agricultural Research (CGIAR) — issued a 2-page policy
brief that enumerated several policy recommendations for dealing with high
international commodity prices and their harmful effect on groups vulnerable to food
insecurity. First, IFPRI calls for short-run reinforcement and expansion of social
protection and nutrition programs targeted to vulnerable groups. Second, IFPRI calls
for elimination of biofuel subsidies and mandates. Third, IFPRI recommends the
elimination of trade barriers to reduce market distortions and thereby allow correct
price signals to reach agricultural producers. Finally, IFPRI encourages long-term
investment in agricultural research and extension, rural infrastructure, and market
access for small farmers.117
The World Bank (WB) also has released a list of policy recommendations in
response to the emerging global food crisis. The WB’s recommendation focus on
those policy options designed to improve household food security. The WB recently
released a policy option paper as a partial guide for government policy designed to
respond to the current high commodity prices in international markets.118 As such,
the WB prioritizes policy options by their effectiveness at reaching target groups, the
equity of distribution of program benefits, and the degree of market distortions
introduced. The WB lists country-level policy options under three broad classes:
Targeted Safety Net Programs; Measures to Lower Domestic Food Prices; and
Measures to Stimulate Medium-term Food Grain Production.
Possible World Trade Organization (WTO) Implications
In an attempt to deal with its own food-import dependency while responding to
the global food crisis and the proliferation of export restrictions, Japanese officials
have announced that Japan will be offering a formal proposal in the WTO’s Doha
Round of multilateral trade negotiations calling for stronger disciplines on exporting
Doha agriculture negotiations chair, Crawford Falconer, has proposed
eliminating all existing export restrictions by the end of the first year of the
117 “Rising Food Prices: What Should Be Done?” Joachim von Braun, IFPRI Policy Brief,
April 2008, at [http://www.ifpri.org/themes/foodprices/foodprices.asp].
118 Rising Food Prices: Policy Options and World Bank Response,” Background note for the
Development Committee, prepared by PREM, ARD, and DEC drawing from across the
Bank; undated mimeo, at [http://www.worldbank.org/].
119 “A Proposal on Food Export Restrictions,” World Trade Daily, Vol. 17, No. 87, April 30,
implementation of any new agreement.120 In addition, he has proposed that any new
export restrictions and prohibitions be allowed only for a period of 12 months,
extendable up to a maximum of 18 months, in consultations with affected importers.
120 “Revised Draft Modalities for Agriculture,” TN/AG/W/4/Rev.1, WTO, February 8, 2008.