How to Understand High Food Prices

Agricultural price booms are better explained by common factors than by market-specific factors such as supply shocks. A CAPM-type model shows why one should expect this and Granger-causality analysis establishes the role of demand growth, monetary expansion and exchange rate movements in explaining price movements over the period since 1971. The demand for grains and oilseeds as biofuel feedstocks has been cited as the main cause of the price rise but there is little direct evidence for this contention. Instead, index-based investment in agricultural futures markets is seen as the major channel through which macroeconomic and monetary factors generated the 2007-08 food price rises.