Author: Raghbendra Jha, Professor of Economics, ANU

The global spike in food prices started late in 2007 and shows no signs of abating. The price of rice, the most important cereal crop consumed in the Asia-Pacific region, was rising steadily but incrementally until late 2007, by which time it was about double the levels of 2002.

But there was a huge spike in the price of rice in late 2007 to early 2008. The monthly average price for the benchmark white rice, Thai 100per cent B grade, went up from $US385 ($422) a tonne in January to a peak of $US962.60 in May before falling marginally to $836.50 in July.

In today’s Australian I argue that global trading activity in futures and options in agricultural derivatives markets has been experiencing very high rates of increase since February 2005. These have only accelerated since the sub-prime mortgage crisis.

Global trading activity in futures and options in agricultural derivatives markets has been experiencing very high rates of increase since February 2005. These have only accelerated since the sub-prime mortgage crisis.

The rise in futures prices of food grains has pulled up spot prices. This then caused the spike in food prices that we have been witnessing since late 2007. Thus the credit and food price crises are linked and have to be understood as such.

With hindsight, this conclusion should not surprise us. In the wake of the sharp fall in stock markets beginning in the third quarter of 2001 (which followed the collapse of the dotcom bubble and the terrorist attacks in the US), vast amounts of funds moved from stock markets into housing markets and led to sharp rises in house prices.

This time around, however, the problems began with the housing sector and, thus, alternative destinations for funds had to be found.

Food markets presented a relatively safe home. However, this eruption of food prices represents the most regressive form of taxation, since the prices of the commodities consumed in disproportionately large amounts by the poor have increased so fast and all estimates of future poverty reduction have been thrown off gear.