After more than 30 years of generally falling grain prices, it came as a shock when the cost of cereals spiked between late 2007 and early 2008. The price of maize and wheat doubled, while rice trebled in cost. Though prices fell back, harvest shocks in 2010 (Black Sea countries) and 2012 (US mid-west) caused another, less dramatic increase.
Unsurprisingly, some observers wondered if high and unstable cereals prices were the new norm. The system, it seemed, was broken.
But it is increasingly clear that it is not. World cereals prices have fallen back again, and major price rises seem unlikely in the near future.
So what's been going on? With the benefit of hindsight, the spike of 2007-08 was caused by three major changes: higher oil prices, anexplosion of ethanol production in the US, and rising wages in parts of Asia. These factors left the cereals market, where stocks were already low, vulnerable to harvest failures. When those failures occurred, in 2006 and 2007, prices rose. Further increases followed when some governments panicked, either by limiting exports or importing more in a tight market.
Since 2007, farmers have been trying to adjust to the new conditions. However, owing to the harvest failures of 2010 and 2012, and the surprising growth of US demand for distillation to ethanol, which continued through to 2011, it has taken them until recently to do so.
Finally, though, the market seems to have recovered equilibrium. There have been few harvest shocks over the past 18 months, while the expansion of ethanol in the US has halted. Oil prices, meanwhile, have barely risen since 2011.
Above all, farmers have finally caught up with the prices, planting more and raising yields. Grain production has increased significantly since 2007. In the seven years before the spike, cereals production grew by just 9%, to 146m tons; in the seven years since, there has been a 16% increase, to 329m tons.
Surprisingly, almost three-quarters of the increase has come from the developing world, not from the traditional grain exporters of North America, Australia, South America and the Black Sea countries. That's partly a response to higher prices, but it also reflects the efforts of governments and donors – including the $22bn (£13bn) promised at theL'Aquila meeting of the G8 in 2009 – to help farmers boost production. In many developing countries farmers were assisted to get seed and fertiliser, and in some cases price incentives were introduced.
Although cereals prices have fallen back, they are still higher than they were in 2005: in constant terms, 74% higher for maize, 60% more for wheat, and 32% more for rice. That's because oil prices have risen by 70% since 2005, and with them the cost of fertiliser; an astonishing 130m tons of maize is turned into ethanol in the US annually; and labour costs on many Asian farms have risen as jobs in cities increase the cost of farm labour.
What have we learned from the past seven years? For one thing, the system is not broken, even if optimists have been reminded that a resilient system can become volatile if perturbed sufficiently. Moreover, some of the policies proposed in response to the 2007 spike – creating world cereals reserves, putting heavy restrictions on futures trading – were unnecessary, and would have achieved little despite exacting a high cost in terms of funds and political capital. And last but not least, determined public action to raise staples production across the developing world to meet new demands has paid off.
